There's Been No Shortage Of Growth Recently For DigitalOcean Holdings' (NYSE:DOCN) Returns On Capital

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So on that note, DigitalOcean Holdings (NYSE:DOCN) looks quite promising in regards to its trends of return on capital.

What Is 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. The formula for this calculation on DigitalOcean Holdings is:

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

0.077 = US$103m ÷ (US$1.5b - US$176m) (Based on the trailing twelve months to September 2024).

Thus, DigitalOcean Holdings has an ROCE of 7.7%. In absolute terms, that's a low return and it also under-performs the IT industry average of 10%.

See our latest analysis for DigitalOcean Holdings

Above you can see how the current ROCE for DigitalOcean Holdings compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for DigitalOcean Holdings .

What The Trend Of ROCE Can Tell Us

The fact that DigitalOcean Holdings is now generating some pre-tax profits from its prior investments is very encouraging. The company was generating losses five years ago, but now it's earning 7.7% which is a sight for sore eyes. Not only that, but the company is utilizing 520% more capital than before, but that's to be expected from a company trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

One more thing to note, DigitalOcean Holdings has decreased current liabilities to 12% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. So this improvement in ROCE has come from the business' underlying economics, which is great to see.

In Conclusion...

To the delight of most shareholders, DigitalOcean Holdings has now broken into profitability. And since the stock has fallen 69% over the last three years, there might be an opportunity here. With that in mind, we believe the promising trends warrant this stock for further investigation.

DigitalOcean Holdings does have some risks, we noticed 4 warning signs (and 2 which can't be ignored) we think you should 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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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.