Capital Allocation Trends At Doximity (NYSE:DOCS) Aren't Ideal

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. In light of that, when we looked at Doximity (NYSE:DOCS) and its ROCE trend, we weren't exactly thrilled.

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. The formula for this calculation on Doximity is:

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

0.18 = US$164m ÷ (US$1.0b - US$105m) (Based on the trailing twelve months to December 2023).

Thus, Doximity has an ROCE of 18%. In absolute terms, that's a satisfactory return, but compared to the Healthcare Services industry average of 7.3% it's much better.

View our latest analysis for Doximity

In the above chart we have measured Doximity's 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 Doximity for free.

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at Doximity doesn't inspire confidence. To be more specific, ROCE has fallen from 26% over the last four years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

On a related note, Doximity has decreased its current liabilities to 10% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

What We Can Learn From Doximity's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Doximity. And there could be an opportunity here if other metrics look good too, because the stock has declined 29% in the last year. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

If you're still interested in Doximity it's worth checking out our FREE intrinsic value approximation for DOCS to see if it's trading at an attractive price in other respects.

While Doximity 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.