Returns On Capital Are Showing Encouraging Signs At DCM Nouvelle (NSE:DCMNVL)

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So on that note, DCM Nouvelle (NSE:DCMNVL) looks quite promising in regards to its trends of return on capital.

Return On Capital Employed (ROCE): What Is It?

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 DCM Nouvelle is:

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

0.12 = ₹439m ÷ (₹4.4b - ₹695m) (Based on the trailing twelve months to December 2022).

So, DCM Nouvelle has an ROCE of 12%. That's a pretty standard return and it's in line with the industry average of 12%.

See 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?

We're delighted to see that DCM Nouvelle is reaping rewards from its investments and is now generating some pre-tax profits. About five years ago the company was generating losses but things have turned around because it's now earning 12% on its capital. And unsurprisingly, like most companies trying to break into the black, DCM Nouvelle is utilizing 912,578% more capital than it was five years ago. 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.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Essentially the business now has suppliers or short-term creditors funding about 16% of its operations, which isn't ideal. Keep an eye out for future increases because when the ratio of current liabilities to total assets gets particularly high, this can introduce some new risks for the business.

The Bottom Line On DCM Nouvelle's ROCE

Long story short, we're delighted to see that DCM Nouvelle's reinvestment activities have paid off and the company is now profitable. Since the stock has returned a staggering 510% to shareholders over the last three years, it looks like investors are recognizing these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.

Like most companies, DCM Nouvelle does come with some risks, and we've found 2 warning signs that you should be aware of.

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

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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.