Dell Technologies (NYSE:DELL) Is Looking To Continue Growing Its Returns On Capital

By
Simply Wall St
Published
June 18, 2021
NYSE:DELL
Source: Shutterstock

There are a few key trends to look for if we want to identify the next multi-bagger. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. With that in mind, we've noticed some promising trends at Dell Technologies (NYSE:DELL) so let's look a bit deeper.

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. The formula for this calculation on Dell Technologies is:

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

0.083 = US$5.6b ÷ (US$122b - US$55b) (Based on the trailing twelve months to April 2021).

So, Dell Technologies has an ROCE of 8.3%. On its own that's a low return, but compared to the average of 6.1% generated by the Tech industry, it's much better.

View our latest analysis for Dell Technologies

roce
NYSE:DELL Return on Capital Employed June 19th 2021

Above you can see how the current ROCE for Dell Technologies compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Dell Technologies here for free.

How Are Returns Trending?

The fact that Dell Technologies 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 8.3% which is a sight for sore eyes. And unsurprisingly, like most companies trying to break into the black, Dell Technologies is utilizing 227% more capital than it was five years ago. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

Another thing to note, Dell Technologies has a high ratio of current liabilities to total assets of 45%. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

In Conclusion...

To the delight of most shareholders, Dell Technologies has now broken into profitability. And with the stock having performed exceptionally well over the last year, these patterns are being accounted for by investors. Therefore, we think it would be worth your time to check if these trends are going to continue.

One final note, you should learn about the 3 warning signs we've spotted with Dell Technologies (including 1 which is a bit unpleasant) .

While Dell Technologies 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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