Investors Could Be Concerned With Deem Roll-Tech's (NSE:DEEM) Returns On Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Deem Roll-Tech (NSE:DEEM), we don't think it's current trends fit the mold of a multi-bagger.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Deem Roll-Tech, this is the formula:

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

0.087 = ₹79m ÷ (₹1.3b - ₹421m) (Based on the trailing twelve months to September 2024).

Therefore, Deem Roll-Tech has an ROCE of 8.7%. In absolute terms, that's a low return and it also under-performs the Metals and Mining industry average of 14%.

Check out our latest analysis for Deem Roll-Tech

Historical performance is a great place to start when researching a stock so above you can see the gauge for Deem Roll-Tech's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Deem Roll-Tech.

The Trend Of ROCE

In terms of Deem Roll-Tech's historical ROCE movements, the trend isn't fantastic. Around three years ago the returns on capital were 19%, but since then they've fallen to 8.7%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

On a side note, Deem Roll-Tech has done well to pay down its current liabilities to 32% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Key Takeaway

To conclude, we've found that Deem Roll-Tech is reinvesting in the business, but returns have been falling. Since the stock has declined 67% over the last year, investors may not be too optimistic on this trend improving either. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

One more thing to note, we've identified 2 warning signs with Deem Roll-Tech and understanding them should be part of your investment process.

While Deem Roll-Tech 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.