Diplomat Holdings (TLV:DIPL) Is Reinvesting At Lower Rates Of Return

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after investigating Diplomat Holdings (TLV:DIPL), we don't think it's current trends fit the mold of a multi-bagger.

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. Analysts use this formula to calculate it for Diplomat Holdings:

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

0.11 = ₪114m ÷ (₪1.5b - ₪506m) (Based on the trailing twelve months to December 2022).

Thus, Diplomat Holdings has an ROCE of 11%. In absolute terms, that's a satisfactory return, but compared to the Consumer Retailing industry average of 8.5% it's much better.

See our latest analysis for Diplomat Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for Diplomat Holdings' ROCE against it's prior returns. If you'd like to look at how Diplomat Holdings has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is Diplomat Holdings' ROCE Trending?

When we looked at the ROCE trend at Diplomat Holdings, we didn't gain much confidence. Over the last four years, returns on capital have decreased to 11% from 25% four years ago. However it looks like Diplomat Holdings might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a related note, Diplomat Holdings has decreased its current liabilities to 33% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Bottom Line On Diplomat Holdings' ROCE

To conclude, we've found that Diplomat Holdings is reinvesting in the business, but returns have been falling. And in the last year, the stock has given away 29% so the market doesn't look too hopeful on these trends strengthening any time soon. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

On a separate note, we've found 1 warning sign for Diplomat Holdings you'll probably want to know about.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.