Return Trends At Danieli & C. Officine Meccaniche (BIT:DAN) Aren't Appealing

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Danieli & C. Officine Meccaniche (BIT:DAN) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What is 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. Analysts use this formula to calculate it for Danieli & C. Officine Meccaniche:

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

0.058 = €136m ÷ (€5.1b - €2.8b) (Based on the trailing twelve months to December 2020).

Thus, Danieli & C. Officine Meccaniche has an ROCE of 5.8%. On its own that's a low return on capital but it's in line with the industry's average returns of 5.8%.

Check out our latest analysis for Danieli & C. Officine Meccaniche

In the above chart we have measured Danieli & C. Officine Meccaniche's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Danieli & C. Officine Meccaniche.

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

Things have been pretty stable at Danieli & C. Officine Meccaniche, with its capital employed and returns on that capital staying somewhat the same for the last five years. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. So unless we see a substantial change at Danieli & C. Officine Meccaniche in terms of ROCE and additional investments being made, we wouldn't hold our breath on it being a multi-bagger.

On a separate but related note, it's important to know that Danieli & C. Officine Meccaniche has a current liabilities to total assets ratio of 54%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

In Conclusion...

We can conclude that in regards to Danieli & C. Officine Meccaniche's returns on capital employed and the trends, there isn't much change to report on. Unsurprisingly, the stock has only gained 22% over the last five years, which potentially indicates that investors are accounting for this going forward. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

If you'd like to know about the risks facing Danieli & C. Officine Meccaniche, we've discovered 2 warning signs that you should be aware of.

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