The Trend Of High Returns At Dr. Martens (LON:DOCS) Has Us Very Interested

If you're looking for a multi-bagger, there's a few things to keep an eye out for. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at the ROCE trend of Dr. Martens (LON:DOCS) we really liked what we saw.

What Is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Dr. Martens:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.20 = UK£166m ÷ (UK£1.0b - UK£201m) (Based on the trailing twelve months to September 2023).

Thus, Dr. Martens has an ROCE of 20%. In absolute terms that's a very respectable return and compared to the Luxury industry average of 18% it's pretty much on par.

Check out our latest analysis for Dr. Martens

In the above chart we have measured Dr. Martens' prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Dr. Martens for free.

What The Trend Of ROCE Can Tell Us

We like the trends that we're seeing from Dr. Martens. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 20%. Basically the business is earning more per dollar of capital invested and in addition to that, 113% more capital is being employed now too. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

What We Can Learn From Dr. Martens' ROCE

All in all, it's terrific to see that Dr. Martens is reaping the rewards from prior investments and is growing its capital base. And since the stock has dived 80% over the last three years, there may be other factors affecting the company's prospects. Regardless, we think the underlying fundamentals warrant this stock for further investigation.

If you want to know some of the risks facing Dr. Martens we've found 4 warning signs (1 is a bit concerning!) that you should be aware of before investing here.

Dr. Martens is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.