What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Speaking of which, we noticed some great changes in DCW's (NSE:DCW) returns on capital, so let's have a look.
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 DCW, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.14 = ₹2.2b ÷ (₹21b - ₹6.2b) (Based on the trailing twelve months to September 2023).
Therefore, DCW has an ROCE of 14%. By itself that's a normal return on capital and it's in line with the industry's average returns of 14%.
Check out our latest analysis for DCW
Historical performance is a great place to start when researching a stock so above you can see the gauge for DCW's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of DCW, check out these free graphs here.
What The Trend Of ROCE Can Tell Us
We like the trends that we're seeing from DCW. The data shows that returns on capital have increased substantially over the last five years to 14%. The amount of capital employed has increased too, by 31%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.
On a related note, the company's ratio of current liabilities to total assets has decreased to 29%, which basically reduces it's funding from the likes of short-term creditors or suppliers. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books.
In Conclusion...
To sum it up, DCW has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And a remarkable 408% total return over the last five years tells us that investors are expecting more good things to come in the future. Therefore, we think it would be worth your time to check if these trends are going to continue.
On a separate note, we've found 1 warning sign for DCW you'll probably want to know about.
While DCW 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.
About NSEI:DCW
DCW
Engages in the manufacture and sale of heavy chemical products in India.
Excellent balance sheet and slightly overvalued.
