Returns On Capital Signal Tricky Times Ahead For Drillcon (STO:DRIL)

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Having said that, from a first glance at Drillcon (STO:DRIL) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Drillcon is:

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

0.12 = kr28m ÷ (kr350m - kr121m) (Based on the trailing twelve months to September 2024).

Thus, Drillcon has an ROCE of 12%. That's a relatively normal return on capital, and it's around the 10% generated by the Metals and Mining industry.

View our latest analysis for Drillcon

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

So How Is Drillcon's ROCE Trending?

When we looked at the ROCE trend at Drillcon, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 12% from 19% five years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

The Bottom Line On Drillcon's ROCE

To conclude, we've found that Drillcon is reinvesting in the business, but returns have been falling. And in the last five years, the stock has given away 25% so the market doesn't look too hopeful on these trends strengthening any time soon. Therefore based on the analysis done in this article, we don't think Drillcon has the makings of a multi-bagger.

One more thing: We've identified 3 warning signs with Drillcon (at least 1 which is significant) , and understanding them would certainly be useful.

While Drillcon 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.