D P Wires (NSE:DPWIRES) Is Reinvesting At Lower Rates Of Return

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Having said that, while the ROCE is currently high for D P Wires (NSE:DPWIRES), we aren't jumping out of our chairs because returns are decreasing.

What Is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on D P Wires is:

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

0.23 = ₹494m ÷ (₹3.1b - ₹977m) (Based on the trailing twelve months to December 2023).

Thus, D P Wires has an ROCE of 23%. In absolute terms that's a great return and it's even better than the Metals and Mining industry average of 15%.

Check out our latest analysis for D P Wires

Historical performance is a great place to start when researching a stock so above you can see the gauge for D P Wires' ROCE against it's prior returns. If you'd like to look at how D P Wires has performed in the past in other metrics, you can view this free graph of D P Wires' past earnings, revenue and cash flow.

What Can We Tell From D P Wires' ROCE Trend?

When we looked at the ROCE trend at D P Wires, we didn't gain much confidence. To be more specific, while the ROCE is still high, it's fallen from 29% where it was five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

What We Can Learn From D P Wires' ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for D P Wires. And the stock has done incredibly well with a 730% return over the last five years, so long term investors are no doubt ecstatic with that result. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

One more thing to note, we've identified 1 warning sign with D P Wires and understanding this should be part of your investment process.

D P Wires is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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.