Returns On Capital Are Showing Encouraging Signs At Donegal Investment Group (ISE:DQ7A)

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So on that note, Donegal Investment Group (ISE:DQ7A) looks quite promising in regards to its trends of return on capital.

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What Is Return On Capital Employed (ROCE)?

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. The formula for this calculation on Donegal Investment Group is:

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

0.16 = €2.6m ÷ (€30m - €14m) (Based on the trailing twelve months to February 2025).

Therefore, Donegal Investment Group has an ROCE of 16%. On its own, that's a standard return, however it's much better than the 9.8% generated by the Food industry.

View our latest analysis for Donegal Investment Group

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

What The Trend Of ROCE Can Tell Us

Donegal Investment Group has not disappointed in regards to ROCE growth. We found that the returns on capital employed over the last five years have risen by 141%. The company is now earning €0.2 per dollar of capital employed. Interestingly, the business may be becoming more efficient because it's applying 47% less capital than it was five years ago. Donegal Investment Group may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. The current liabilities has increased to 46% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.

In Conclusion...

In summary, it's great to see that Donegal Investment Group has been able to turn things around and earn higher returns on lower amounts of capital. 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 separate note, we've found 3 warning signs for Donegal Investment Group you'll probably want to know about.

While Donegal Investment Group 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.