If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Speaking of which, we noticed some great changes in DB's (KRX:012030) returns on capital, so let's have a look.
Understanding 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 DB:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.076 = ₩27b ÷ (₩472b - ₩118b) (Based on the trailing twelve months to December 2020).
So, DB has an ROCE of 7.6%. Ultimately, that's a low return and it under-performs the IT industry average of 10%.
View our latest analysis for DB
Historical performance is a great place to start when researching a stock so above you can see the gauge for DB's ROCE against it's prior returns. If you're interested in investigating DB's past further, check out this free graph of past earnings, revenue and cash flow.
What Can We Tell From DB's ROCE Trend?
We're glad to see that ROCE is heading in the right direction, even if it is still low at the moment. Over the last five years, returns on capital employed have risen substantially to 7.6%. The amount of capital employed has increased too, by 68%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.
The Bottom Line On DB's ROCE
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 DB has. Since the stock has only returned 16% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.
One more thing to note, we've identified 1 warning sign with DB and understanding it should be part of your investment process.
While DB 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. 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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About KOSE:A012030
Questionable track record with imperfect balance sheet.
