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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. With that in mind, we've noticed some promising trends at Dhunseri Ventures (NSE:DVL) so let's look a bit deeper.
Understanding 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. To calculate this metric for Dhunseri Ventures, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.075 = ₹1.4b ÷ (₹19b - ₹342m) (Based on the trailing twelve months to March 2021).
Thus, Dhunseri Ventures has an ROCE of 7.5%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 15%.
Check out our latest analysis for Dhunseri Ventures
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're interested in investigating Dhunseri Ventures' past further, check out this free graph of past earnings, revenue and cash flow.
What Does the ROCE Trend For Dhunseri Ventures Tell Us?
While in absolute terms it isn't a high ROCE, it's promising to see that it has been moving in the right direction. The data shows that returns on capital have increased substantially over the last five years to 7.5%. Basically the business is earning more per dollar of capital invested and in addition to that, 76% more capital is being employed now too. 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, Dhunseri Ventures has decreased current liabilities to 1.8% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. This tells us that Dhunseri Ventures has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.
Our Take On Dhunseri Ventures' ROCE
In summary, it's great to see that Dhunseri Ventures can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. 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.
If you want to know some of the risks facing Dhunseri Ventures we've found 4 warning signs (1 is significant!) that you should be aware of before investing here.
While Dhunseri Ventures 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. 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.
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About NSEI:DVL
Dhunseri Ventures
Engages in the treasury operations in shares and securities in India.
Good value with adequate balance sheet and pays a dividend.
