D.P. Wires (NSE:DPWIRES) Is Very Good At Capital Allocation

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at the ROCE trend of D.P. Wires (NSE:DPWIRES) we really liked what we saw.

Return On Capital Employed (ROCE): What is it?

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. The formula for this calculation on D.P. Wires is:

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

0.29 = ₹409m ÷ (₹1.8b - ₹374m) (Based on the trailing twelve months to December 2021).

So, D.P. Wires has an ROCE of 29%. In absolute terms that's a great return and it's even better than the Metals and Mining industry average of 18%.

View our latest analysis for D.P. Wires

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. 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 past earnings, revenue and cash flow.

So How Is D.P. Wires' ROCE Trending?

We like the trends that we're seeing from D.P. Wires. The data shows that returns on capital have increased substantially over the last five years to 29%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 260%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

One more thing to note, D.P. Wires has decreased current liabilities to 21% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance.

The Bottom Line On D.P. Wires' ROCE

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what D.P. Wires has. Since the stock has returned a staggering 375% to shareholders over the last three years, it looks like investors are recognizing these changes. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

One more thing to note, we've identified 2 warning signs with D.P. Wires and understanding them should be part of your investment process.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high 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.