Decarbonization Plus Acquisition Corporation IV's (NASDAQ:HHRS) Returns On Capital Are Heading Higher

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, we've noticed some promising trends at Decarbonization Plus Acquisition Corporation IV (NASDAQ:HHRS) so let's look a bit deeper.

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

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 Decarbonization Plus Acquisition Corporation IV:

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

0.19 = CA$275m ÷ (CA$1.6b - CA$142m) (Based on the trailing twelve months to September 2022).

Therefore, Decarbonization Plus Acquisition Corporation IV has an ROCE of 19%. That's a relatively normal return on capital, and it's around the 21% generated by the Oil and Gas industry.

View our latest analysis for Decarbonization Plus Acquisition Corporation IV

Historical performance is a great place to start when researching a stock so above you can see the gauge for Decarbonization Plus Acquisition Corporation IV's ROCE against it's prior returns. If you're interested in investigating Decarbonization Plus Acquisition Corporation IV's past further, check out this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

Shareholders will be relieved that Decarbonization Plus Acquisition Corporation IV has broken into profitability. While the business was unprofitable in the past, it's now turned things around and is earning 19% on its capital. Interestingly, the capital employed by the business has remained relatively flat, so these higher returns are either from prior investments paying off or increased efficiencies. With no noticeable increase in capital employed, it's worth knowing what the company plans on doing going forward in regards to reinvesting and growing the business. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.

The Bottom Line On Decarbonization Plus Acquisition Corporation IV's ROCE

To sum it up, Decarbonization Plus Acquisition Corporation IV is collecting higher returns from the same amount of capital, and that's impressive. And with a respectable 52% awarded to those who held the stock over the last year, you could argue that these developments are starting to get the attention they deserve. 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.

If you'd like to know about the risks facing Decarbonization Plus Acquisition Corporation IV, we've discovered 1 warning sign that 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.