Stock Analysis

Investors Shouldn't Overlook The Favourable Returns On Capital At Donaldson Company (NYSE:DCI)

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NYSE:DCI
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Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. With that in mind, the ROCE of Donaldson Company (NYSE:DCI) looks attractive right now, so lets see what the trend of returns can tell us.

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 Donaldson Company:

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

0.23 = US$445m ÷ (US$2.6b - US$630m) (Based on the trailing twelve months to July 2022).

So, Donaldson Company has an ROCE of 23%. In absolute terms that's a great return and it's even better than the Machinery industry average of 10.0%.

Check out our latest analysis for Donaldson Company

roce
NYSE:DCI Return on Capital Employed September 5th 2022

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 to see what analysts are forecasting going forward, you should check out our free report for Donaldson Company.

What Does the ROCE Trend For Donaldson Company Tell Us?

We'd be pretty happy with returns on capital like Donaldson Company. The company has employed 32% more capital in the last five years, and the returns on that capital have remained stable at 23%. Returns like this are the envy of most businesses and given it has repeatedly reinvested at these rates, that's even better. You'll see this when looking at well operated businesses or favorable business models.

The Key Takeaway

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. And given the stock has only risen 27% over the last five years, we'd suspect the market is beginning to recognize these trends. So because of the trends we're seeing, we'd recommend looking further into this stock to see if it has the makings of a multi-bagger.

If you'd like to know about the risks facing Donaldson Company, we've discovered 1 warning sign that you should be aware of.

High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.

What are the risks and opportunities for Donaldson Company?

Donaldson Company, Inc. manufactures and sells filtration systems and replacement parts worldwide.

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Rewards

  • Trading at 5.4% below our estimate of its fair value

  • Earnings are forecast to grow 6.9% per year

  • Earnings grew by 13.5% over the past year

Risks

  • Significant insider selling over the past 3 months

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About NYSE:DCI

Donaldson Company

Donaldson Company, Inc. manufactures and sells filtration systems and replacement parts worldwide.

The Snowflake is a visual investment summary with the score of each axis being calculated by 6 checks in 5 areas.

Analysis AreaScore (0-6)
Valuation1
Future Growth2
Past Performance5
Financial Health6
Dividends5

Read more about these checks in the individual report sections or in our analysis model.

Flawless balance sheet with solid track record and pays a dividend.