There's Been No Shortage Of Growth Recently For Devro's (LON:DVO) Returns On Capital
If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, 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. With that in mind, we've noticed some promising trends at Devro (LON:DVO) so let's look a bit deeper.
Return On Capital Employed (ROCE): What is it?
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Devro:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.15 = UK£42m ÷ (UK£330m - UK£43m) (Based on the trailing twelve months to June 2021).
Thus, Devro has an ROCE of 15%. In absolute terms, that's a satisfactory return, but compared to the Food industry average of 8.3% it's much better.
Check out our latest analysis for Devro
In the above chart we have measured Devro'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 Devro here for free.
The Trend Of ROCE
You'd find it hard not to be impressed with the ROCE trend at Devro. The figures show that over the last five years, returns on capital have grown by 57%. The company is now earning UK£0.1 per dollar of capital employed. In regards to capital employed, Devro appears to been achieving more with less, since the business is using 24% less capital to run its operation. If this trend continues, the business might be getting more efficient but it's shrinking in terms of total assets.
The Bottom Line
In the end, Devro has proven it's capital allocation skills are good with those higher returns from less amount of capital. Considering the stock has delivered 12% to its stockholders over the last five years, it may be fair to think that investors aren't fully aware of the promising trends yet. So with that in mind, we think the stock deserves further research.
On a final note, we've found 1 warning sign for Devro that we think you should be aware of.
While Devro isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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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