Is Digital Turbine (NASDAQ:APPS) A Future Multi-bagger?

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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So on that note, Digital Turbine (NASDAQ:APPS) looks quite promising in regards to its trends of return on capital.

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. To calculate this metric for Digital Turbine, this is the formula:

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

0.18 = US$21m ÷ (US$192m - US$79m) (Based on the trailing twelve months to June 2020).

Therefore, Digital Turbine has an ROCE of 18%. On its own, that's a standard return, however it's much better than the 9.2% generated by the Software industry.

See our latest analysis for Digital Turbine

In the above chart we have measured Digital Turbine's prior ROCE against its prior performance, but the future is arguably more important. 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 Digital Turbine's ROCE Trend?

The fact that Digital Turbine is now generating some pre-tax profits from its prior investments is very encouraging. About five years ago the company was generating losses but things have turned around because it's now earning 18% on its capital. And unsurprisingly, like most companies trying to break into the black, Digital Turbine is utilizing 22% more capital than it was five years ago. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Effectively this means that suppliers or short-term creditors are now funding 41% of the business, which is more than it was five years ago. And with current liabilities at those levels, that's pretty high.

Our Take On Digital Turbine's ROCE

To the delight of most shareholders, Digital Turbine has now broken into profitability. Since the stock has returned a staggering 1,104% to shareholders over the last five years, it looks like investors are recognizing these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

On a separate note, we've found 3 warning signs for Digital Turbine you'll probably want to know about.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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