Returns On Capital At Danieli & C. Officine Meccaniche (BIT:DAN) Have Hit The Brakes

If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. Having said that, from a first glance at Danieli & C. Officine Meccaniche (BIT:DAN) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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

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).

Therefore, Danieli & C. Officine Meccaniche has an ROCE of 5.8%. Ultimately, that's a low return and it under-performs the Machinery industry average of 8.7%.

View 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, you can check out the forecasts from the analysts covering Danieli & C. Officine Meccaniche here for free.

What Can We Tell From Danieli & C. Officine Meccaniche's ROCE Trend?

There hasn't been much to report for Danieli & C. Officine Meccaniche's returns and its level of capital employed because both metrics have been steady for the past five years. This tells us the company isn't reinvesting in itself, so it's plausible that it's past the growth phase. With that in mind, unless investment picks up again in the future, we wouldn't expect Danieli & C. Officine Meccaniche to be a multi-bagger going forward.

Another thing to note, Danieli & C. Officine Meccaniche has a high ratio of current liabilities to total assets of 54%. 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. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Bottom Line On Danieli & C. Officine Meccaniche's ROCE

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. Since the stock has gained an impressive 43% over the last five years, investors must think there's better things to come. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

One more thing, we've spotted 1 warning sign facing Danieli & C. Officine Meccaniche that you might find interesting.

While Danieli & C. Officine Meccaniche may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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