To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So when we looked at Drozapol-Profil (WSE:DPL) and its trend of ROCE, we really liked what we saw.
Understanding Return On Capital Employed (ROCE)
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Drozapol-Profil is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.11 = zł10m ÷ (zł122m - zł30m) (Based on the trailing twelve months to September 2022).
Thus, Drozapol-Profil has an ROCE of 11%. In absolute terms, that's a pretty standard return but compared to the Trade Distributors industry average it falls behind.
Check out our latest analysis for Drozapol-Profil
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of Drozapol-Profil, check out these free graphs here.
What Does the ROCE Trend For Drozapol-Profil Tell Us?
We're delighted to see that Drozapol-Profil is reaping rewards from its investments and is now generating some pre-tax profits. The company was generating losses five years ago, but now it's earning 11% which is a sight for sore eyes. In addition to that, Drozapol-Profil is employing 62% more capital than previously which is expected of a company that's trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.
In Conclusion...
In summary, it's great to see that Drozapol-Profil has managed to break into profitability and is continuing to reinvest in its business. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. Therefore, we think it would be worth your time to check if these trends are going to continue.
One more thing to note, we've identified 5 warning signs with Drozapol-Profil and understanding these should be part of your investment process.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
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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.
About WSE:DPL
Excellent balance sheet and good value.
