Shareholders Are Optimistic That Donaldson Company (NYSE:DCI) Will Multiply In Value

There are a few key trends to look for if we want to identify the next multi-bagger. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing 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.

Return On Capital Employed (ROCE): What Is It?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Donaldson Company is:

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

0.24 = US$467m ÷ (US$2.5b - US$569m) (Based on the trailing twelve months to October 2022).

So, Donaldson Company has an ROCE of 24%. That's a fantastic return and not only that, it outpaces the average of 11% earned by companies in a similar industry.

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're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

The Trend Of ROCE

It's hard not to be impressed by Donaldson Company's returns on capital. The company has consistently earned 24% for the last five years, and the capital employed within the business has risen 20% in that time. Returns like this are the envy of most businesses and given it has repeatedly reinvested at these rates, that's even better. If Donaldson Company can keep this up, we'd be very optimistic about its future.

The Bottom Line

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 given the stock has only risen 27% over the last five years, we'd suspect the market is beginning to recognize these trends. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.