Returns On Capital Are Showing Encouraging Signs At Darling Ingredients (NYSE:DAR)

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Speaking of which, we noticed some great changes in Darling Ingredients' (NYSE:DAR) returns on capital, so let's have a look.

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. To calculate this metric for Darling Ingredients, this is the formula:

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

0.072 = US$707m ÷ (US$11b - US$1.1b) (Based on the trailing twelve months to April 2023).

So, Darling Ingredients has an ROCE of 7.2%. In absolute terms, that's a low return and it also under-performs the Food industry average of 9.7%.

Check out our latest analysis for Darling Ingredients

Above you can see how the current ROCE for Darling Ingredients compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Can We Tell From Darling Ingredients' ROCE Trend?

While in absolute terms it isn't a high ROCE, it's promising to see that it has been moving in the right direction. Over the last five years, returns on capital employed have risen substantially to 7.2%. The amount of capital employed has increased too, by 113%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

The Bottom Line On Darling Ingredients' ROCE

To sum it up, Darling Ingredients has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And a remarkable 240% total return over the last five years tells us that investors are expecting more good things to come in the future. Therefore, we think it would be worth your time to check if these trends are going to continue.

Darling Ingredients does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is a bit concerning...

While Darling Ingredients 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.