There's Been No Shortage Of Growth Recently For Digital Turbine's (NASDAQ:APPS) Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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. Speaking of which, we noticed some great changes in Digital Turbine's (NASDAQ:APPS) returns on capital, so let's have a look.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested 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)

0.11 = US$114m ÷ (US$1.4b - US$313m) (Based on the trailing twelve months to September 2022).

So, Digital Turbine has an ROCE of 11%. That's a relatively normal return on capital, and it's around the 10% generated by the Software industry.

View 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'd like to see what analysts are forecasting going forward, you should check out our free report for Digital Turbine.

What The Trend Of ROCE Can Tell Us

Digital Turbine has recently broken into profitability so their prior investments seem to be paying off. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 11% on its capital. And unsurprisingly, like most companies trying to break into the black, Digital Turbine is utilizing 1,319% more capital than it was five years ago. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

On a related note, the company's ratio of current liabilities to total assets has decreased to 23%, which basically reduces it's funding from the likes of short-term creditors or suppliers. This tells us that Digital Turbine has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

The Key Takeaway

Long story short, we're delighted to see that Digital Turbine's reinvestment activities have paid off and the company is now profitable. Since the stock has returned a staggering 696% to shareholders over the last five years, it looks like investors are recognizing these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.

One more thing: We've identified 4 warning signs with Digital Turbine (at least 1 which is potentially serious) , and understanding them would certainly be useful.

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.