Darco Water Technologies (SGX:BLR) Is Doing The Right Things To Multiply Its Share Price

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So on that note, Darco Water Technologies (SGX:BLR) looks quite promising in regards to its trends of return on capital.

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. Analysts use this formula to calculate it for Darco Water Technologies:

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

0.044 = S$1.5m ÷ (S$79m - S$44m) (Based on the trailing twelve months to December 2024).

Thus, Darco Water Technologies has an ROCE of 4.4%. On its own, that's a low figure but it's around the 5.1% average generated by the Machinery industry.

View our latest analysis for Darco Water Technologies

Historical performance is a great place to start when researching a stock so above you can see the gauge for Darco Water Technologies' ROCE against it's prior returns. If you'd like to look at how Darco Water Technologies has performed in the past in other metrics, you can view this free graph of Darco Water Technologies' past earnings, revenue and cash flow.

What Does the ROCE Trend For Darco Water Technologies Tell Us?

Like most people, we're pleased that Darco Water Technologies is now generating some pretax earnings. Historically the company was generating losses but as we can see from the latest figures referenced above, they're now earning 4.4% on their capital employed. In regards to capital employed, Darco Water Technologies is using 21% less capital than it was five years ago, which on the surface, can indicate that the business has become more efficient at generating these returns. The reduction could indicate that the company is selling some assets, and considering returns are up, they appear to be selling the right ones.

On a separate but related note, it's important to know that Darco Water Technologies has a current liabilities to total assets ratio of 55%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line

In a nutshell, we're pleased to see that Darco Water Technologies has been able to generate higher returns from less capital. Given the stock has declined 40% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. So researching this company further and determining whether or not these trends will continue seems justified.

Darco Water Technologies does have some risks though, and we've spotted 2 warning signs for Darco Water Technologies that you might be interested in.

While Darco Water Technologies may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list 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.