DLH Holdings (NASDAQ:DLHC) Is Looking To Continue Growing Its Returns On Capital

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. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So on that note, DLH Holdings (NASDAQ:DLHC) looks quite promising in regards to its trends of return on capital.

Understanding Return On Capital Employed (ROCE)

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. Analysts use this formula to calculate it for DLH Holdings:

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

0.19 = US$26m ÷ (US$188m - US$54m) (Based on the trailing twelve months to December 2021).

Therefore, DLH Holdings has an ROCE of 19%. In absolute terms, that's a satisfactory return, but compared to the Professional Services industry average of 11% it's much better.

Check out our latest analysis for DLH Holdings

In the above chart we have measured DLH Holdings' 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 DLH Holdings here for free.

What The Trend Of ROCE Can Tell Us

We like the trends that we're seeing from DLH Holdings. The data shows that returns on capital have increased substantially over the last five years to 19%. The amount of capital employed has increased too, by 167%. So we're very much inspired by what we're seeing at DLH Holdings thanks to its ability to profitably reinvest capital.

Our Take On DLH Holdings' ROCE

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what DLH Holdings has. And a remarkable 195% total return over the last five years tells us that investors are expecting more good things to come in the future. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

On a final note, we've found 2 warning signs for DLH Holdings that we think you should be aware of.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.