Digicontent's (NSE:DGCONTENT) Returns Have Hit A Wall

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Although, when we looked at Digicontent (NSE:DGCONTENT), it didn't seem to tick all of these boxes.

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 Digicontent:

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

0.12 = ₹156m ÷ (₹2.2b - ₹834m) (Based on the trailing twelve months to September 2023).

Therefore, Digicontent has an ROCE of 12%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Interactive Media and Services industry average of 14%.

Check out our latest analysis for Digicontent

Historical performance is a great place to start when researching a stock so above you can see the gauge for Digicontent's ROCE against it's prior returns. If you're interested in investigating Digicontent's past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Digicontent Tell Us?

Over the past four years, Digicontent's ROCE and capital employed have both remained mostly flat. This tells us the company isn't reinvesting in itself, so it's plausible that it's past the growth phase. So don't be surprised if Digicontent doesn't end up being a multi-bagger in a few years time.

On another note, while the change in ROCE trend might not scream for attention, it's interesting that the current liabilities have actually gone up over the last four years. This is intriguing because if current liabilities hadn't increased to 38% of total assets, this reported ROCE would probably be less than12% because total capital employed would be higher.The 12% ROCE could be even lower if current liabilities weren't 38% of total assets, because the the formula would show a larger base of total capital employed. With that in mind, just be wary if this ratio increases in the future, because if it gets particularly high, this brings with it some new elements of risk.

Our Take On Digicontent's ROCE

In a nutshell, Digicontent has been trudging along with the same returns from the same amount of capital over the last four years. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 104% gain to shareholders who have held over the last three years. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

If you want to know some of the risks facing Digicontent we've found 2 warning signs (1 makes us a bit uncomfortable!) that you should be aware of before investing here.

While Digicontent 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.