There's Been No Shortage Of Growth Recently For Danieli & C. Officine Meccaniche's (BIT:DAN) Returns On Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing 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.

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 Danieli & C. Officine Meccaniche:

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

0.095 = €299m ÷ (€7.2b - €4.1b) (Based on the trailing twelve months to December 2023).

Therefore, Danieli & C. Officine Meccaniche has an ROCE of 9.5%. Ultimately, that's a low return and it under-performs the Machinery industry average of 12%.

Check out 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'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Danieli & C. Officine Meccaniche .

What Does the ROCE Trend For Danieli & C. Officine Meccaniche Tell Us?

Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. The data shows that returns on capital have increased substantially over the last five years to 9.5%. The amount of capital employed has increased too, by 38%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

On a side note, Danieli & C. Officine Meccaniche's current liabilities are still rather high at 56% of total assets. 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.

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

To sum it up, Danieli & C. Officine Meccaniche has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And a remarkable 103% total return over the last five years tells us that investors are expecting more good things to come in the future. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

On the other side of ROCE, we have to consider valuation. That's why we have a FREE intrinsic value estimation for DAN on our platform that is definitely worth checking out.

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.

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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.