If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, we've noticed some promising trends at Dalekovod D.D (ZGSE:DLKV) so let's look a bit deeper.
What is Return On Capital Employed (ROCE)?
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Dalekovod D.D, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.13 = Kn47m ÷ (Kn957m - Kn579m) (Based on the trailing twelve months to March 2021).
So, Dalekovod D.D has an ROCE of 13%. In absolute terms, that's a satisfactory return, but compared to the Construction industry average of 9.5% it's much better.
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of Dalekovod D.D, check out these free graphs here.
So How Is Dalekovod D.D's ROCE Trending?
You'd find it hard not to be impressed with the ROCE trend at Dalekovod D.D. We found that the returns on capital employed over the last five years have risen by 153%. The company is now earning Kn0.1 per dollar of capital employed. Interestingly, the business may be becoming more efficient because it's applying 60% less capital than it was five years ago. Dalekovod D.D may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.
Another thing to note, Dalekovod D.D has a high ratio of current liabilities to total assets of 61%. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.
What We Can Learn From Dalekovod D.D's ROCE
In a nutshell, we're pleased to see that Dalekovod D.D has been able to generate higher returns from less capital. Although the company may be facing some issues elsewhere since the stock has plunged 90% in the last five years. Regardless, we think the underlying fundamentals warrant this stock for further investigation.
Dalekovod D.D does have some risks, we noticed 3 warning signs (and 2 which don't sit too well with us) we think you should know about.
While Dalekovod D.D 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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