There are a few key trends to look for if we want to identify the next multi-bagger. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at Dekel Agri-Vision (LON:DKL), it didn't seem to tick all of these boxes.
Return On Capital Employed (ROCE): What Is It?
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Dekel Agri-Vision, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.064 = €2.6m ÷ (€52m - €10m) (Based on the trailing twelve months to December 2021).
So, Dekel Agri-Vision has an ROCE of 6.4%. Ultimately, that's a low return and it under-performs the Food industry average of 11%.
See our latest analysis for Dekel Agri-Vision
In the above chart we have measured Dekel Agri-Vision'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 Dekel Agri-Vision here for free.
What The Trend Of ROCE Can Tell Us
On the surface, the trend of ROCE at Dekel Agri-Vision doesn't inspire confidence. Over the last five years, returns on capital have decreased to 6.4% from 12% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.
The Bottom Line
While returns have fallen for Dekel Agri-Vision in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. But since the stock has dived 75% in the last five years, there could be other drivers that are influencing the business' outlook. Therefore, we'd suggest researching the stock further to uncover more about the business.
One final note, you should learn about the 3 warning signs we've spotted with Dekel Agri-Vision (including 1 which makes us a bit uncomfortable) .
While Dekel Agri-Vision isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.