This analysis is intended to introduce important early concepts to people who are starting to invest and want a simplistic look at the return on Debock Sales and Marketing Limited (NSE:DSML) stock.
If you purchase a DSML share you are effectively becoming a partner with many other shareholders. Your equity share is granted in return for the capital provided to the business to operate, and in order for an investment to be successful the business has to create earnings from the funds that make up this capital. This is because the actual cash flow generated by the business dictates the potential for income (dividends) and capital appreciation (price increases), which are the two ways to achieve positive returns when buying a stock. Thus, to understand how your money can grow by investing in Debock Sales and Marketing, you need to look at what the company returns to owners for the use of their capital, which can be done in many ways but today we will use return on capital employed (ROCE).View out our latest analysis for Debock Sales and Marketing
What is Return on Capital Employed (ROCE)?
You only have a finite amount of capital to invest, so there are only so many companies that you can add to your portfolio. The cost of missing out on another opportunity comes in the form of the potential long term gain you could've received, which is dependent on the gap between the return on capital you could've achieved and that of the company you invested in. Hence, capital returns are very important, and should be examined before you invest in conjunction with a certain benchmark that represents the minimum return you require to be compensated for the risk of missing out on other potentially lucrative investments. We'll look at Debock Sales and Marketing’s returns by computing return on capital employed, which will tell us what the company can generate from the money spent in operations. DSML’s ROCE is calculated below:
ROCE Calculation for DSML
Return on Capital Employed (ROCE) = Earnings Before Tax (EBT) ÷ (Capital Employed)
Capital Employed = (Total Assets - Current Liabilities)
∴ ROCE = ₹7.30m ÷ (₹300.74m - ₹229.90m) = 10.31%
DSML’s 10.31% ROCE means that for every ₹100 you invest, the company creates ₹10.3. This makes Debock Sales and Marketing slightly mediocre when compared to a robust 15% ROCE yardstick. So if this rate continues in to the future, investor capital will be able to compound over time, but still may be missing out on some potential growth elsewhere.
Then why have investors invested?
DSML doesn't return an attractive amount on capital, but this will only continue if the company is unable to increase earnings or decrease current capital requirements. Therefore, investors need to understand the trend of the inputs in the formula above, so that they can see if there is an opportunity to invest. Three years ago, DSML’s ROCE was 7.94%, which means the company's capital returns have improved. We can see that earnings have increased from ₹335.00k to ₹7.30m whilst the amount of capital employed also grew but by a proportionally lesser volume, which suggests the larger ROCE is due to a growth in earnings relative to capital requirements.
ROCE for DSML investors is below the desired level at the moment, however, the company has triggered an upward trend over the recent past which could signal an opportunity for a solid return on investment in the long term. But don't forget, return on capital employed is a static metric that should be looked at in conjunction with other fundamental indicators like future prospects and management ability to determine whether there is potential for return by focusing our attention elsewhere. If you’re building your portfolio and want to take a deeper look, I’ve added a few links below that will help you further evaluate DSML or move on to other alternatives.
- Future Outlook: What are well-informed industry analysts predicting for DSML’s future growth? Take a look at our free research report of analyst consensus for DSML’s outlook.
- Management:Have insiders been ramping up their shares to take advantage of the market's sentiment for Debock Sales and Marketing's future outlook? Check out our management and board analysis with insights on CEO compensation and governance factors.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.