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If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. That's why when we briefly looked at DLH Holdings' (NASDAQ:DLHC) ROCE trend, we were pretty happy with what we saw.
Return On Capital Employed (ROCE): What is it?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on DLH Holdings is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.11 = US$16m ÷ (US$186m - US$48m) (Based on the trailing twelve months to March 2021).
Therefore, DLH Holdings has an ROCE of 11%. By itself that's a normal return on capital and it's in line with the industry's average returns of 11%.
Above you can see how the current ROCE for DLH Holdings 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 DLH Holdings Tell Us?
While the current returns on capital are decent, they haven't changed much. Over the past five years, ROCE has remained relatively flat at around 11% and the business has deployed 478% more capital into its operations. Since 11% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.
What We Can Learn From DLH Holdings' ROCE
In the end, DLH Holdings has proven its ability to adequately reinvest capital at good rates of return. On top of that, the stock has rewarded shareholders with a remarkable 116% return to those who've held over the last five years. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.
One more thing, we've spotted 1 warning sign facing DLH Holdings that you might find interesting.
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.
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.
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