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If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. In light of that, when we looked at Delegat Group (NZSE:DGL) and its ROCE trend, we weren't exactly thrilled.
Understanding 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 Delegat Group is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.076 = NZ$81m ÷ (NZ$1.1b - NZ$50m) (Based on the trailing twelve months to June 2024).
Therefore, Delegat Group has an ROCE of 7.6%. Ultimately, that's a low return and it under-performs the Beverage industry average of 12%.
View our latest analysis for Delegat Group
Above you can see how the current ROCE for Delegat Group compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Delegat Group .
So How Is Delegat Group's ROCE Trending?
When we looked at the ROCE trend at Delegat Group, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 7.6% from 11% five years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.
Our Take On Delegat Group's ROCE
Bringing it all together, while we're somewhat encouraged by Delegat Group's reinvestment in its own business, we're aware that returns are shrinking. And investors appear hesitant that the trends will pick up because the stock has fallen 50% in the last five years. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.
Delegat Group does have some risks, we noticed 3 warning signs (and 1 which is significant) we think you should know about.