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. 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, DCM Nouvelle (NSE:DCMNVL) looks quite promising in regards to its trends of return on capital.
What is Return On Capital Employed (ROCE)?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for DCM Nouvelle, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.054 = ₹100m ÷ (₹2.8b - ₹977m) (Based on the trailing twelve months to September 2020).
Thus, DCM Nouvelle has an ROCE of 5.4%. In absolute terms, that's a low return and it also under-performs the Luxury industry average of 8.1%.
View our latest analysis for DCM Nouvelle
Historical performance is a great place to start when researching a stock so above you can see the gauge for DCM Nouvelle's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of DCM Nouvelle, check out these free graphs here.
What Can We Tell From DCM Nouvelle's ROCE Trend?
The fact that DCM Nouvelle is now generating some pre-tax profits from its prior investments is very encouraging. Shareholders would no doubt be pleased with this because the business was loss-making three years ago but is is now generating 5.4% on its capital. In addition to that, DCM Nouvelle is employing 452,241% more capital than previously which is expected of a company that's trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.
On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Essentially the business now has suppliers or short-term creditors funding about 35% of its operations, which isn't ideal. It's worth keeping an eye on this because as the percentage of current liabilities to total assets increases, some aspects of risk also increase.The Bottom Line On DCM Nouvelle's ROCE
To the delight of most shareholders, DCM Nouvelle has now broken into profitability. Since the total return from the stock has been almost flat over the last year, there might be an opportunity here if the valuation looks good. That being the case, research into the company's current valuation metrics and future prospects seems fitting.
On a separate note, we've found 3 warning signs for DCM Nouvelle 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. 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.
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About NSEI:DCMNVL
DCM Nouvelle
Engages in the manufacturing and sale of cotton yarn in India, Bangladesh, China, Eqypt, and internationally.
Mediocre balance sheet low.