Danieli & C. Officine Meccaniche (BIT:DAN) Might Have The Makings Of A Multi-Bagger

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. So on that note, Danieli & C. Officine Meccaniche (BIT:DAN) looks quite promising in regards to its trends of return on capital.

Understanding Return On Capital Employed (ROCE)

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 Danieli & C. Officine Meccaniche, this is the formula:

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

0.088 = €218m ÷ (€6.2b - €3.7b) (Based on the trailing twelve months to June 2022).

Thus, Danieli & C. Officine Meccaniche has an ROCE of 8.8%. On its own that's a low return on capital but it's in line with the industry's average returns of 9.2%.

See our latest analysis for Danieli & C. Officine Meccaniche

Above you can see how the current ROCE for Danieli & C. Officine Meccaniche compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

So How Is Danieli & C. Officine Meccaniche's ROCE Trending?

We're glad to see that ROCE is heading in the right direction, even if it is still low at the moment. The data shows that returns on capital have increased substantially over the last five years to 8.8%. The amount of capital employed has increased too, by 20%. So we're very much inspired by what we're seeing at Danieli & C. Officine Meccaniche thanks to its ability to profitably reinvest capital.

On a side note, Danieli & C. Officine Meccaniche's current liabilities are still rather high at 60% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line

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 Danieli & C. Officine Meccaniche has. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 8.9% to shareholders. So with that in mind, we think the stock deserves further research.

Danieli & C. Officine Meccaniche does have some risks though, and we've spotted 1 warning sign for Danieli & C. Officine Meccaniche that you might be interested in.

While Danieli & C. Officine Meccaniche isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.