We Think Digital Network (WSE:DIG) Might Have The DNA Of A Multi-Bagger

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. And in light of that, the trends we're seeing at Digital Network's (WSE:DIG) look very promising so lets take a look.

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Return On Capital Employed (ROCE): What Is It?

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. Analysts use this formula to calculate it for Digital Network:

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

0.38 = zł27m ÷ (zł92m - zł20m) (Based on the trailing twelve months to September 2024).

Therefore, Digital Network has an ROCE of 38%. In absolute terms that's a great return and it's even better than the Media industry average of 15%.

See our latest analysis for Digital Network

Historical performance is a great place to start when researching a stock so above you can see the gauge for Digital Network's ROCE against it's prior returns. If you're interested in investigating Digital Network's past further, check out this free graph covering Digital Network's past earnings, revenue and cash flow.

What Can We Tell From Digital Network's ROCE Trend?

The fact that Digital Network is now generating some pre-tax profits from its prior investments is very encouraging. About five years ago the company was generating losses but things have turned around because it's now earning 38% on its capital. And unsurprisingly, like most companies trying to break into the black, Digital Network is utilizing 39% more capital than it was five years ago. 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.

The Bottom Line On Digital Network's ROCE

To the delight of most shareholders, Digital Network has now broken into profitability. Since the stock has returned a staggering 1,877% to shareholders over the last five 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 Digital Network can keep these trends up, it could have a bright future ahead.

If you want to continue researching Digital Network, you might be interested to know about the 2 warning signs that our analysis has discovered.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.

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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.