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Will Dell Technologies' (NYSE:DELL) Growth In ROCE Persist?

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Simply Wall St
·3 min read
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If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. With that in mind, we've noticed some promising trends at Dell Technologies (NYSE:DELL) so let's look a bit deeper.

What is Return On Capital Employed (ROCE)?

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. To calculate this metric for Dell Technologies, this is the formula:

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

0.054 = US$3.7b ÷ (US$119b - US$50b) (Based on the trailing twelve months to October 2020).

Thus, Dell Technologies has an ROCE of 5.4%. On its own that's a low return, but compared to the average of 3.3% generated by the Tech industry, it's much better.

Check out our latest analysis for Dell Technologies

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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 to see what analysts are forecasting going forward, you should check out our free report for Dell Technologies.

What Does the ROCE Trend For Dell Technologies Tell Us?

We're delighted to see that Dell Technologies is reaping rewards from its investments and is now generating some pre-tax profits. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 5.4% on its capital. And unsurprisingly, like most companies trying to break into the black, Dell Technologies is utilizing 223% 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.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 42%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. This tells us that Dell Technologies has grown its returns without a reliance on increasing their current liabilities, which we're very happy with. Nevertheless, there are some potential risks the company is bearing with current liabilities that high, so just keep that in mind.

The Key Takeaway

To the delight of most shareholders, Dell Technologies has now broken into profitability. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 67% return over the last year. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

If you want to know some of the risks facing Dell Technologies we've found 4 warning signs (1 can't be ignored!) that you should be aware of before investing here.

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.

This article by Simply Wall St is general in nature. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.