We Like These Underlying Return On Capital Trends At Dominion Hosting Holding (BIT:DHH)

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Speaking of which, we noticed some great changes in Dominion Hosting Holding's (BIT:DHH) returns on capital, so let's have a look.

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 Dominion Hosting Holding:

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

0.044 = €1.0m ÷ (€31m - €7.6m) (Based on the trailing twelve months to December 2020).

Therefore, Dominion Hosting Holding has an ROCE of 4.4%. In absolute terms, that's a low return and it also under-performs the IT industry average of 7.1%.

View our latest analysis for Dominion Hosting Holding

In the above chart we have measured Dominion Hosting Holding's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

So How Is Dominion Hosting Holding's ROCE Trending?

Dominion Hosting Holding has recently broken into profitability so their prior investments seem to be paying off. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 4.4% on its capital. And unsurprisingly, like most companies trying to break into the black, Dominion Hosting Holding is utilizing 2,566% more capital than it was five years ago. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Essentially the business now has suppliers or short-term creditors funding about 25% of its operations, which isn't ideal. It's worth keeping an eye on this because as the percentage of current liabilities to total assets increases, some aspects of risk also increase.

In Conclusion...

In summary, it's great to see that Dominion Hosting Holding has managed to break into profitability and is continuing to reinvest in its business. Since the stock has returned a staggering 157% to shareholders over the last three years, it looks like investors are recognizing these changes. In light of that, we think it's worth looking further into this stock because if Dominion Hosting Holding can keep these trends up, it could have a bright future ahead.

One final note, you should learn about the 3 warning signs we've spotted with Dominion Hosting Holding (including 1 which makes us a bit uncomfortable) .

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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This article by Simply Wall St is general in nature. 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.
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