If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after briefly looking over the numbers, we don't think DCW (NSE:DCW) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
What Is Return On Capital Employed (ROCE)?
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for DCW:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.05 = ₹739m ÷ (₹21b - ₹6.1b) (Based on the trailing twelve months to June 2024).
Thus, DCW has an ROCE of 5.0%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 14%.
View 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're interested in investigating DCW's past further, check out this free graph covering DCW's past earnings, revenue and cash flow.
What The Trend Of ROCE Can Tell Us
In terms of DCW's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 8.4% over the last five years. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.
Our Take On DCW's ROCE
In summary, we're somewhat concerned by DCW's diminishing returns on increasing amounts of capital. Yet despite these poor fundamentals, the stock has gained a huge 445% over the last five years, so investors appear very optimistic. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.
On a final note, we've found 2 warning signs for DCW that we think you should be aware of.
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 fair value.
