Dromeas (ATH:DROME) Shareholders Will Want The ROCE Trajectory To Continue

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at Dromeas (ATH:DROME) and its trend of ROCE, we really liked what we saw.

Understanding 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. The formula for this calculation on Dromeas is:

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

0.048 = €2.3m ÷ (€65m - €17m) (Based on the trailing twelve months to June 2023).

Therefore, Dromeas has an ROCE of 4.8%. Ultimately, that's a low return and it under-performs the Commercial Services industry average of 10%.

Check out our latest analysis for Dromeas

Historical performance is a great place to start when researching a stock so above you can see the gauge for Dromeas' ROCE against it's prior returns. If you're interested in investigating Dromeas' past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Dromeas Tell Us?

While there are companies with higher returns on capital out there, we still find the trend at Dromeas promising. More specifically, while the company has kept capital employed relatively flat over the last five years, the ROCE has climbed 76% in that same time. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.

In Conclusion...

In summary, we're delighted to see that Dromeas has been able to increase efficiencies and earn higher rates of return on the same amount of capital. And with a respectable 52% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. In light of that, we think it's worth looking further into this stock because if Dromeas can keep these trends up, it could have a bright future ahead.

On a final note, we found 4 warning signs for Dromeas (1 shouldn't be ignored) you should be aware of.

While Dromeas may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.