The Returns On Capital At Dynamatic Technologies (NSE:DYNAMATECH) Don't Inspire Confidence

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding 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. In light of that, when we looked at Dynamatic Technologies (NSE:DYNAMATECH) and its ROCE trend, we weren't exactly thrilled.

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 Dynamatic Technologies is:

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

0.10 = ₹1.0b ÷ (₹15b - ₹5.6b) (Based on the trailing twelve months to December 2023).

So, Dynamatic Technologies has an ROCE of 10%. In absolute terms, that's a pretty standard return but compared to the Auto Components industry average it falls behind.

View our latest analysis for Dynamatic Technologies

In the above chart we have measured Dynamatic Technologies' prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Dynamatic Technologies .

What Can We Tell From Dynamatic Technologies' ROCE Trend?

Unfortunately, the trend isn't great with ROCE falling from 15% five years ago, while capital employed has grown 25%. That being said, Dynamatic Technologies raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. It's unlikely that all of the funds raised have been put to work yet, so as a consequence Dynamatic Technologies might not have received a full period of earnings contribution from it. It's also worth noting the company's latest EBIT figure is within 10% of the previous year, so it's fair to assign the ROCE drop largely to the capital raise.

The Bottom Line On Dynamatic Technologies' ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Dynamatic Technologies is reinvesting for growth and has higher sales as a result. And long term investors must be optimistic going forward because the stock has returned a huge 467% to shareholders in the last five years. So should these growth trends continue, we'd be optimistic on the stock going forward.

One final note, you should learn about the 2 warning signs we've spotted with Dynamatic Technologies (including 1 which doesn't sit too well with us) .

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

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.