What Do The Returns On Capital At Delfi (SGX:P34) Tell Us?

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we looked at Delfi (SGX:P34), it didn't seem to tick all of these boxes.

Return On Capital Employed (ROCE): What is it?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Delfi:

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

0.17 = US$41m ÷ (US$378m - US$138m) (Based on the trailing twelve months to June 2020).

So, Delfi has an ROCE of 17%. On its own, that's a standard return, however it's much better than the 10% generated by the Food industry.

See our latest analysis for Delfi

In the above chart we have measured Delfi's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Delfi here for free.

What Does the ROCE Trend For Delfi Tell Us?

We've noticed that although returns on capital are flat over the last five years, the amount of capital employed in the business has fallen 20% in that same period. This indicates to us that assets are being sold and thus the business is likely shrinking, which you'll remember isn't the typical ingredients for an up-and-coming multi-bagger. So if this trend continues, don't be surprised if the business is smaller in a few years time.

The Key Takeaway

Overall, we're not ecstatic to see Delfi reducing the amount of capital it employs in the business. And in the last five years, the stock has given away 65% so the market doesn't look too hopeful on these trends strengthening any time soon. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

On a final note, we've found 1 warning sign for Delfi that we think you should be aware of.

While Delfi 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. 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.
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