Yahoo Finance Digital Turbine (NASDAQ:APPS) Shareholders Will Want The ROCE Trajectory To Continue
There are a few key trends to look for if we want to identify the next multi-bagger. 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at Digital Turbine (NASDAQ:APPS) and its trend of ROCE, we really liked what we saw.
What Is Return On Capital Employed (ROCE)?
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 Digital Turbine is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.085 = US$91m ÷ (US$1.4b - US$289m) (Based on the trailing twelve months to December 2022).
Therefore, Digital Turbine has an ROCE of 8.5%. Even though it's in line with the industry average of 9.4%, it's still a low return by itself.
View our latest analysis for Digital Turbine
Above you can see how the current ROCE for Digital Turbine 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 Digital Turbine here for free.
What The Trend Of ROCE Can Tell Us
Digital Turbine has recently broken into profitability so their prior investments seem to be paying off. The company was generating losses five years ago, but now it's earning 8.5% which is a sight for sore eyes. And unsurprisingly, like most companies trying to break into the black, Digital Turbine is utilizing 1,319% more capital than it was five years ago. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.
On a related note, the company's ratio of current liabilities to total assets has decreased to 21%, which basically reduces it's funding from the likes of short-term creditors or suppliers. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books.
The Key Takeaway
To the delight of most shareholders, Digital Turbine has now broken into profitability. And a remarkable 607% total return over the last five years tells us that investors are expecting more good things to come in the future. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.
Like most companies, Digital Turbine does come with some risks, and we've found 4 warning signs that you should be aware of.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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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