Will Dromeas' (ATH:DROME) Growth In ROCE Persist?

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. With that in mind, we've noticed some promising trends at Dromeas (ATH:DROME) so let's look a bit deeper.

Return On Capital Employed (ROCE): What is it?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Dromeas:

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

0.031 = €1.6m ÷ (€65m - €15m) (Based on the trailing twelve months to June 2020).

Thus, Dromeas has an ROCE of 3.1%. Ultimately, that's a low return and it under-performs the Commercial Services industry average of 10%.

View 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.

So How Is Dromeas' ROCE Trending?

Dromeas has broken into the black (profitability) and we're sure it's a sight for sore eyes. The company now earns 3.1% on its capital, because five years ago it was incurring losses. While returns have increased, the amount of capital employed by Dromeas has remained flat over the period. So while we're happy that the business is more efficient, just keep in mind that could mean that going forward the business is lacking areas to invest internally for growth. Because in the end, a business can only get so efficient.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. The current liabilities has increased to 23% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. Keep an eye out for future increases because when the ratio of current liabilities to total assets gets particularly high, this can introduce some new risks for the business.

The Bottom Line

To bring it all together, Dromeas has done well to increase the returns it's generating from its capital employed. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

On a final note, we found 3 warning signs for Dromeas (1 is potentially serious) you should be aware of.

While Dromeas isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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This article by Simply Wall St is general in nature. 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.
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