What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Speaking of which, we noticed some great changes in DCM Nouvelle's (NSE:DCMNVL) returns on capital, so let's have a look.
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. Analysts use this formula to calculate it for DCM Nouvelle:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.11 = ₹204m ÷ (₹2.8b - ₹977m) (Based on the trailing twelve months to December 2020).
So, DCM Nouvelle has an ROCE of 11%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Luxury industry average of 9.5%.
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating DCM Nouvelle's past further, check out this free graph of past earnings, revenue and cash flow.
The Trend Of ROCE
We're delighted to see that DCM Nouvelle is reaping rewards from its investments and is now generating some pre-tax profits. About three years ago the company was generating losses but things have turned around because it's now earning 11% on its capital. And unsurprisingly, like most companies trying to break into the black, DCM Nouvelle is utilizing 452,241% more capital than it was three 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.
On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Effectively this means that suppliers or short-term creditors are now funding 35% of the business, which is more than it was three years ago. 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.
To the delight of most shareholders, DCM Nouvelle has now broken into profitability. Since the stock has returned a staggering 152% to shareholders over the last year, it looks like investors are recognizing these changes. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.
One final note, you should learn about the 5 warning signs we've spotted with DCM Nouvelle (including 2 which are potentially serious) .
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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