Here's What To Make Of DMC Global's (NASDAQ:BOOM) Decelerating Rates Of Return
What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after briefly looking over the numbers, we don't think DMC Global (NASDAQ:BOOM) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
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 DMC Global, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.02 = US$15m ÷ (US$865m - US$122m) (Based on the trailing twelve months to September 2022).
So, DMC Global has an ROCE of 2.0%. In absolute terms, that's a low return and it also under-performs the Energy Services industry average of 7.0%.
See our latest analysis for DMC Global
In the above chart we have measured DMC Global's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering DMC Global here for free.
What Does the ROCE Trend For DMC Global Tell Us?
There are better returns on capital out there than what we're seeing at DMC Global. The company has employed 464% more capital in the last five years, and the returns on that capital have remained stable at 2.0%. 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.
Our Take On DMC Global's ROCE
As we've seen above, DMC Global's returns on capital haven't increased but it is reinvesting in the business. Unsurprisingly then, the total return to shareholders over the last five years has been flat. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.
If you're still interested in DMC Global it's worth checking out our FREE intrinsic value approximation to see if it's trading at an attractive price in other respects.
While DMC Global 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.
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