Returns On Capital At DLH Holdings (NASDAQ:DLHC) Have Hit The Brakes

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we looked at DLH Holdings (NASDAQ:DLHC), it didn't seem to tick all of these boxes.

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

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its 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)

0.091 = US$24m ÷ (US$325m - US$65m) (Based on the trailing twelve months to December 2024).

Therefore, DLH Holdings has an ROCE of 9.1%. In absolute terms, that's a low return and it also under-performs the Professional Services industry average of 16%.

Check out our latest analysis for DLH Holdings

Above you can see how the current ROCE for DLH Holdings 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 analyst report for DLH Holdings .

So How Is DLH Holdings' ROCE Trending?

The returns on capital haven't changed much for DLH Holdings in recent years. Over the past five years, ROCE has remained relatively flat at around 9.1% and the business has deployed 111% more capital into its operations. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

What We Can Learn From DLH Holdings' ROCE

As we've seen above, DLH Holdings' returns on capital haven't increased but it is reinvesting in the business. And in the last five years, the stock has given away 29% so the market doesn't look too hopeful on these trends strengthening any time soon. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

DLH Holdings does have some risks, we noticed 3 warning signs (and 2 which are potentially serious) we think you should know about.

While DLH Holdings may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list 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.