Yahoo Finance Investors Met With Slowing Returns on Capital At DCC (LON:DCC)
Did you know there are some financial metrics that can provide clues of a potential 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. In light of that, when we looked at DCC (LON:DCC) and its ROCE trend, we weren't exactly thrilled.
Understanding Return On Capital Employed (ROCE)
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested 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)
0.099 = UK£567m ÷ (UK£9.5b - UK£3.7b) (Based on the trailing twelve months to March 2024).
Thus, DCC has an ROCE of 9.9%. In absolute terms, that's a low return, but it's much better than the Industrials industry average of 6.3%.
Check out our latest analysis for DCC
Above you can see how the current ROCE for DCC 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 DCC for free.
What The Trend Of ROCE Can Tell Us
In terms of DCC's historical ROCE trend, it doesn't exactly demand attention. The company has consistently earned 9.9% for the last five years, and the capital employed within the business has risen 31% in that time. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.
The Bottom Line On DCC's ROCE
As we've seen above, DCC's returns on capital haven't increased but it is reinvesting in the business. And in the last five years, the stock has given away 12% so the market doesn't look too hopeful on these trends strengthening any time soon. Therefore based on the analysis done in this article, we don't think DCC has the makings of a multi-bagger.
DCC could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation for DCC on our platform quite valuable.
While DCC may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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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.
