discoverIE Group (LON:DSCV) Has More To Do To Multiply In Value Going Forward
Did you know there are some financial metrics that can provide clues of a potential 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at discoverIE Group (LON:DSCV), it didn't seem to tick all of these boxes.
Return On Capital Employed (ROCE): What Is It?
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. Analysts use this formula to calculate it for discoverIE Group:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.088 = UK£38m ÷ (UK£586m - UK£151m) (Based on the trailing twelve months to March 2023).
Thus, discoverIE Group has an ROCE of 8.8%. Ultimately, that's a low return and it under-performs the Electrical industry average of 12%.
View our latest analysis for discoverIE Group
Above you can see how the current ROCE for discoverIE Group compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
What Does the ROCE Trend For discoverIE Group Tell Us?
The returns on capital haven't changed much for discoverIE Group in recent years. Over the past five years, ROCE has remained relatively flat at around 8.8% and the business has deployed 109% more capital into its operations. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.
The Bottom Line On discoverIE Group's ROCE
As we've seen above, discoverIE Group's returns on capital haven't increased but it is reinvesting in the business. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 113% gain to shareholders who have held over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.
discoverIE Group could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation on our platform quite valuable.
While discoverIE Group isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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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.
