Returns On Capital - An Important Metric For Digital Power CommunicationsLtd (KRX:026890)

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Speaking of which, we noticed some great changes in Digital Power CommunicationsLtd's (KRX:026890) returns on capital, so let's have a look.

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 Digital Power CommunicationsLtd:

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

0.12 = ₩21b ÷ (₩242b - ₩61b) (Based on the trailing twelve months to September 2020).

Therefore, Digital Power CommunicationsLtd has an ROCE of 12%. In absolute terms, that's a satisfactory return, but compared to the Electronic industry average of 5.6% it's much better.

View our latest analysis for Digital Power CommunicationsLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Digital Power CommunicationsLtd's ROCE against it's prior returns. If you'd like to look at how Digital Power CommunicationsLtd has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is Digital Power CommunicationsLtd's ROCE Trending?

The trends we've noticed at Digital Power CommunicationsLtd are quite reassuring. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 12%. Basically the business is earning more per dollar of capital invested and in addition to that, 38% more capital is being employed now too. 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.

The Bottom Line

All in all, it's terrific to see that Digital Power CommunicationsLtd is reaping the rewards from prior investments and is growing its capital base. And a remarkable 151% total return over the last five years tells us that investors are expecting more good things to come in the future. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

Digital Power CommunicationsLtd does have some risks, we noticed 2 warning signs (and 1 which is a bit unpleasant) we think you should know about.

While Digital Power CommunicationsLtd 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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