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What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Although, when we looked at DISH Network (NASDAQ:DISH), it didn't seem to tick all of these boxes.
Return On Capital Employed (ROCE): What is it?
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. The formula for this calculation on DISH Network is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.091 = US$2.9b ÷ (US$38b - US$6.1b) (Based on the trailing twelve months to December 2020).
So, DISH Network has an ROCE of 9.1%. On its own that's a low return on capital but it's in line with the industry's average returns of 9.1%.
Above you can see how the current ROCE for DISH Network compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering DISH Network here for free.
What Can We Tell From DISH Network's ROCE Trend?
When we looked at the ROCE trend at DISH Network, we didn't gain much confidence. Around five years ago the returns on capital were 12%, but since then they've fallen to 9.1%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.
The Bottom Line On DISH Network's ROCE
Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for DISH Network. These growth trends haven't led to growth returns though, since the stock has fallen 22% over the last five years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.
DISH Network does have some risks, we noticed 2 warning signs (and 1 which can't be ignored) we think you should know about.
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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