Decora (WSE:DCR) Knows How To Allocate Capital Effectively

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. And in light of that, the trends we're seeing at Decora's (WSE:DCR) look very promising so lets take a look.

Understanding 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. To calculate this metric for Decora, this is the formula:

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

0.32 = zł56m ÷ (zł232m - zł56m) (Based on the trailing twelve months to September 2020).

So, Decora has an ROCE of 32%. In absolute terms that's a great return and it's even better than the Consumer Durables industry average of 9.9%.

View our latest analysis for Decora

Above you can see how the current ROCE for Decora compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Decora here for free.

The Trend Of ROCE

Decora is displaying some positive trends. Over the last five years, returns on capital employed have risen substantially to 32%. Basically the business is earning more per dollar of capital invested and in addition to that, 22% 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.

One more thing to note, Decora has decreased current liabilities to 24% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. This tells us that Decora has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

Our Take On Decora'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 Decora has. And a remarkable 649% total return over the last five years tells us that investors are expecting more good things to come in the future. Therefore, we think it would be worth your time to check if these trends are going to continue.

If you'd like to know more about Decora, we've spotted 3 warning signs, and 1 of them is significant.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.

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