Investors Will Want DoubleDown Interactive's (NASDAQ:DDI) Growth In ROCE To Persist
What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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 DoubleDown Interactive (NASDAQ:DDI) so let's look a bit deeper.
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. The formula for this calculation on DoubleDown Interactive is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.15 = US$107m ÷ (US$761m - US$53m) (Based on the trailing twelve months to September 2023).
Thus, DoubleDown Interactive has an ROCE of 15%. In absolute terms, that's a satisfactory return, but compared to the Entertainment industry average of 10% it's much better.
See our latest analysis for DoubleDown Interactive
In the above chart we have measured DoubleDown Interactive's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for DoubleDown Interactive.
The Trend Of ROCE
DoubleDown Interactive is showing promise given that its ROCE is trending up and to the right. More specifically, while the company has kept capital employed relatively flat over the last three years, the ROCE has climbed 35% in that same time. So it's likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn't changed considerably. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.
What We Can Learn From DoubleDown Interactive's ROCE
To sum it up, DoubleDown Interactive is collecting higher returns from the same amount of capital, and that's impressive. Since the total return from the stock has been almost flat over the last year, there might be an opportunity here if the valuation looks good. So researching this company further and determining whether or not these trends will continue seems justified.
While DoubleDown Interactive looks impressive, no company is worth an infinite price. The intrinsic value infographic in our free research report helps visualize whether DDI is currently trading for a fair price.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.
