Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. With that in mind, we've noticed some promising trends at Dadelo (WSE:DAD) so let's look a bit deeper.
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. The formula for this calculation on Dadelo is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.023 = zł2.7m ÷ (zł143m - zł29m) (Based on the trailing twelve months to September 2023).
Therefore, Dadelo has an ROCE of 2.3%. In absolute terms, that's a low return and it also under-performs the Specialty Retail industry average of 15%.
Check out our latest analysis for Dadelo
Historical performance is a great place to start when researching a stock so above you can see the gauge for Dadelo's ROCE against it's prior returns. If you're interested in investigating Dadelo's past further, check out this free graph covering Dadelo's past earnings, revenue and cash flow.
What Does the ROCE Trend For Dadelo Tell Us?
We're delighted to see that Dadelo is reaping rewards from its investments and is now generating some pre-tax profits. About five years ago the company was generating losses but things have turned around because it's now earning 2.3% on its capital. Not only that, but the company is utilizing 800% more capital than before, but that's to be expected from a company trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.
The Bottom Line
Long story short, we're delighted to see that Dadelo's reinvestment activities have paid off and the company is now profitable. Investors may not be impressed by the favorable underlying trends yet because over the last three years the stock has only returned 19% to shareholders. So with that in mind, we think the stock deserves further research.
One more thing, we've spotted 3 warning signs facing Dadelo that you might find interesting.
While Dadelo 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. 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:DAD
Flawless balance sheet with questionable track record.
