Drilling Tools International (NASDAQ:DTI) Is Achieving High Returns On Its Capital

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. 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. Speaking of which, we noticed some great changes in Drilling Tools International's (NASDAQ:DTI) returns on capital, so let's have a look.

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. Analysts use this formula to calculate it for Drilling Tools International:

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

0.37 = US$25m ÷ (US$105m - US$36m) (Based on the trailing twelve months to December 2022).

Thus, Drilling Tools International has an ROCE of 37%. In absolute terms that's a great return and it's even better than the Energy Services industry average of 9.8%.

Check out our latest analysis for Drilling Tools International

Historical performance is a great place to start when researching a stock so above you can see the gauge for Drilling Tools International's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Drilling Tools International, check out these free graphs here.

The Trend Of ROCE

We're delighted to see that Drilling Tools International is reaping rewards from its investments and is now generating some pre-tax profits. The company was generating losses one year ago, but now it's earning 37% which is a sight for sore eyes. In addition to that, Drilling Tools International is employing 130% more capital than previously which is expected of a company that's trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

One more thing to note, Drilling Tools International has decreased current liabilities to 34% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance.

The Bottom Line On Drilling Tools International's ROCE

In summary, it's great to see that Drilling Tools International has managed to break into profitability and is continuing to reinvest in its business. Astute investors may have an opportunity here because the stock has declined 58% in the last year. So researching this company further and determining whether or not these trends will continue seems justified.

Drilling Tools International does come with some risks though, we found 4 warning signs in our investment analysis, and 2 of those shouldn't be ignored...

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.

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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.