If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think DCC (LON:DCC) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
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. To calculate this metric for DCC, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.082 = UK£427m ÷ (UK£7.9b - UK£2.7b) (Based on the trailing twelve months to March 2020).
Thus, DCC has an ROCE of 8.2%. On its own that's a low return, but compared to the average of 6.3% generated by the Industrials industry, it's much better.
In the above chart we have a measured DCC'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 DCC here for free.
What Can We Tell From DCC's ROCE Trend?
There are better returns on capital out there than what we're seeing at DCC. The company has consistently earned 8.2% for the last five years, and the capital employed within the business has risen 114% in that time. 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.
Long story short, while DCC has been reinvesting its capital, the returns that it's generating haven't increased. Since the stock has gained an impressive 55% over the last five years, investors must think there's better things to come. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.
Like most companies, DCC does come with some risks, and we've found 1 warning sign that you should be aware of.
While DCC 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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