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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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So when we looked at Dierig Holding (ETR:DIE) and its trend of ROCE, we really liked 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. To calculate this metric for Dierig Holding, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.063 = €5.5m ÷ (€114m - €27m) (Based on the trailing twelve months to June 2024).
So, Dierig Holding has an ROCE of 6.3%. In absolute terms, that's a low return and it also under-performs the Luxury industry average of 11%.
Check out our latest analysis for Dierig Holding
Historical performance is a great place to start when researching a stock so above you can see the gauge for Dierig Holding's ROCE against it's prior returns. If you're interested in investigating Dierig Holding's past further, check out this free graph covering Dierig Holding's past earnings, revenue and cash flow.
So How Is Dierig Holding's ROCE Trending?
Dierig Holding is showing promise given that its ROCE is trending up and to the right. The figures show that over the last five years, ROCE has grown 37% whilst employing roughly the same amount of capital. 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. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.
The Bottom Line
In summary, we're delighted to see that Dierig Holding has been able to increase efficiencies and earn higher rates of return on the same amount of capital. And since the stock has fallen 36% over the last five years, there might be an opportunity here. That being the case, research into the company's current valuation metrics and future prospects seems fitting.
Like most companies, Dierig Holding does come with some risks, and we've found 3 warning signs that you should be aware of.