If we want to find a stock that could multiply over the long term, what are the underlying trends we should look 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at DM-KER Zártköruen Muködo Részvénytársaság (BUSE:DMKER), it didn't seem to tick all of these boxes.
Return On Capital Employed (ROCE): What is it?
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 DM-KER Zártköruen Muködo Részvénytársaság:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.089 = Ft432m ÷ (Ft11b - Ft6.0b) (Based on the trailing twelve months to June 2021).
Thus, DM-KER Zártköruen Muködo Részvénytársaság has an ROCE of 8.9%. In absolute terms, that's a low return and it also under-performs the Trade Distributors industry average of 14%.
In the above chart we have measured DM-KER Zártköruen Muködo Részvénytársaság's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for DM-KER Zártköruen Muködo Részvénytársaság.
What Can We Tell From DM-KER Zártköruen Muködo Részvénytársaság's ROCE Trend?
On the surface, the trend of ROCE at DM-KER Zártköruen Muködo Részvénytársaság doesn't inspire confidence. To be more specific, ROCE has fallen from 19% over the last one year. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.
On a side note, DM-KER Zártköruen Muködo Részvénytársaság's current liabilities are still rather high at 55% of total assets. 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.
The Bottom Line
While returns have fallen for DM-KER Zártköruen Muködo Részvénytársaság in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. However, despite the promising trends, the stock has fallen 67% over the last year, so there might be an opportunity here for astute investors. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.
If you want to know some of the risks facing DM-KER Zártköruen Muködo Részvénytársaság we've found 4 warning signs (1 is potentially serious!) that you should be aware of before investing here.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
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.