Capital Allocation Trends At Dalmia Bharat (NSE:DALBHARAT) Aren't Ideal

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. In light of that, when we looked at Dalmia Bharat (NSE:DALBHARAT) and its ROCE trend, we weren't exactly thrilled.

Understanding 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. To calculate this metric for Dalmia Bharat, this is the formula:

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

0.054 = ₹11b ÷ (₹255b - ₹45b) (Based on the trailing twelve months to June 2023).

Thus, Dalmia Bharat has an ROCE of 5.4%. In absolute terms, that's a low return but it's around the Basic Materials industry average of 6.7%.

See our latest analysis for Dalmia Bharat

In the above chart we have measured Dalmia Bharat's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Dalmia Bharat here for free.

What Can We Tell From Dalmia Bharat's ROCE Trend?

On the surface, the trend of ROCE at Dalmia Bharat doesn't inspire confidence. Over the last five years, returns on capital have decreased to 5.4% from 7.2% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

In Conclusion...

In summary, despite lower returns in the short term, we're encouraged to see that Dalmia Bharat is reinvesting for growth and has higher sales as a result. And the stock has done incredibly well with a 215% return over the last three years, so long term investors are no doubt ecstatic with that result. So should these growth trends continue, we'd be optimistic on the stock going forward.

One more thing, we've spotted 1 warning sign facing Dalmia Bharat that you might find interesting.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.