Donaldson Company (NYSE:DCI) Is Reinvesting To Multiply In Value

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So, when we ran our eye over Donaldson Company's (NYSE:DCI) trend of ROCE, we really liked what we saw.

What Is 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. 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$503m ÷ (US$2.8b - US$756m) (Based on the trailing twelve months to July 2023).

So, Donaldson Company has an ROCE of 25%. That's a fantastic return and not only that, it outpaces the average of 12% earned by companies in a similar industry.

Check out our latest analysis for Donaldson Company

Above you can see how the current ROCE for Donaldson Company compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Donaldson Company.

What The Trend Of ROCE Can Tell Us

We'd be pretty happy with returns on capital like Donaldson Company. The company has consistently earned 25% for the last five years, and the capital employed within the business has risen 34% in that time. With returns that high, it's great that the business can continually reinvest its money at such appealing rates of return. If Donaldson Company can keep this up, we'd be very optimistic about its future.

In Conclusion...

In short, we'd argue Donaldson Company has the makings of a multi-bagger since its been able to compound its capital at very profitable rates of return. However, over the last five years, the stock has only delivered a 22% return to shareholders who held over that period. So to determine if Donaldson Company is a multi-bagger going forward, we'd suggest digging deeper into the company's other fundamentals.

On the other side of ROCE, we have to consider valuation. That's why we have a FREE intrinsic value estimation on our platform that is definitely worth checking out.

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.