Will The ROCE Trend At DHT Holdings (NYSE:DHT) Continue?

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. With that in mind, we've noticed some promising trends at DHT Holdings (NYSE:DHT) so let's look a bit deeper.

Return On Capital Employed (ROCE): What is it?

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 DHT Holdings, this is the formula:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.12 = US$200m ÷ (US$1.8b - US$131m) (Based on the trailing twelve months to March 2020).

So, DHT Holdings has an ROCE of 12%. In absolute terms, that's a satisfactory return, but compared to the Oil and Gas industry average of 7.7% it's much better.

See our latest analysis for DHT Holdings

roce

Above you can see how the current ROCE for DHT Holdings 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 DHT Holdings here for free.

The Trend Of ROCE

We like the trends that we're seeing from DHT Holdings. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 12%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 25%. So we're very much inspired by what we're seeing at DHT Holdings thanks to its ability to profitably reinvest capital.

The Key Takeaway

To sum it up, DHT Holdings has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Considering the stock has delivered 3.1% 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. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 5 warning signs for DHT Holdings (of which 2 don't sit too well with us!) that you should know about.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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