A Look Into dotdigital Group's (LON:DOTD) Impressive Returns On Capital

There are a few key trends to look for if we want to identify the next multi-bagger. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. That's why when we briefly looked at dotdigital Group's (LON:DOTD) ROCE trend, we were very happy with what we saw.

What is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for dotdigital Group:

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

0.20 = UK£15m ÷ (UK£83m - UK£11m) (Based on the trailing twelve months to December 2021).

So, dotdigital Group has an ROCE of 20%. In absolute terms that's a great return and it's even better than the Software industry average of 8.3%.

See our latest analysis for dotdigital Group

In the above chart we have measured dotdigital Group's 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 dotdigital Group here for free.

How Are Returns Trending?

It's hard not to be impressed by dotdigital Group's returns on capital. The company has consistently earned 20% for the last five years, and the capital employed within the business has risen 157% in that time. Returns like this are the envy of most businesses and given it has repeatedly reinvested at these rates, that's even better. If these trends can continue, it wouldn't surprise us if the company became a multi-bagger.

What We Can Learn From dotdigital Group's ROCE

In the end, the company has proven it can reinvest it's capital at high rates of returns, which you'll remember is a trait of a multi-bagger. However, over the last five years, the stock has only delivered a 29% return to shareholders who held over that period. So to determine if dotdigital Group is a multi-bagger going forward, we'd suggest digging deeper into the company's other fundamentals.

If you want to continue researching dotdigital Group, you might be interested to know about the 1 warning sign that our analysis has discovered.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.

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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.