Donaldson Company (NYSE:DCI) Is Aiming To Keep Up Its Impressive Returns

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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. That's why when we briefly looked at Donaldson Company's (NYSE:DCI) ROCE trend, we were very happy with what we saw.

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What Is Return On Capital Employed (ROCE)?

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. The formula for this calculation on Donaldson Company is:

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

0.25 = US$557m ÷ (US$3.0b - US$766m) (Based on the trailing twelve months to January 2025).

Thus, Donaldson Company has an ROCE of 25%. In absolute terms that's a great return and it's even better than the Machinery industry average of 12%.

View our latest analysis for Donaldson Company

In the above chart we have measured Donaldson Company'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 Donaldson Company for free.

What The Trend Of ROCE Can Tell Us

It's hard not to be impressed by Donaldson Company's returns on capital. The company has consistently earned 25% for the last five years, and the capital employed within the business has risen 24% in that time. Now considering ROCE is an attractive 25%, this combination is actually pretty appealing because it means the business can consistently put money to work and generate these high returns. If Donaldson Company can keep this up, we'd be very optimistic about its future.

What We Can Learn From Donaldson Company's ROCE

In summary, we're delighted to see that Donaldson Company has been compounding returns by reinvesting at consistently high rates of return, as these are common traits of a multi-bagger. And the stock has followed suit returning a meaningful 83% to shareholders over the last five years. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.

Before jumping to any conclusions though, we need to know what value we're getting for the current share price. That's where you can check out our FREE intrinsic value estimation for DCI that compares the share price and estimated value.

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.