In This Article:
If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So when we looked at Dianomi (LON:DNM) and its trend of ROCE, we really liked what we saw.
What Is Return On Capital Employed (ROCE)?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Dianomi is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.097 = UK£1.1m ÷ (UK£20m - UK£8.6m) (Based on the trailing twelve months to December 2022).
So, Dianomi has an ROCE of 9.7%. Even though it's in line with the industry average of 10%, it's still a low return by itself.
View our latest analysis for Dianomi
Above you can see how the current ROCE for Dianomi compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Dianomi.
So How Is Dianomi's ROCE Trending?
While in absolute terms it isn't a high ROCE, it's promising to see that it has been moving in the right direction. Over the last four years, returns on capital employed have risen substantially to 9.7%. Basically the business is earning more per dollar of capital invested and in addition to that, 256% more capital is being employed now too. So we're very much inspired by what we're seeing at Dianomi thanks to its ability to profitably reinvest capital.
On a side note, Dianomi's current liabilities are still rather high at 42% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.
What We Can Learn From Dianomi's ROCE
All in all, it's terrific to see that Dianomi is reaping the rewards from prior investments and is growing its capital base. And since the stock has fallen 66% over the last year, there might be an opportunity here. That being the case, research into the company's current valuation metrics and future prospects seems fitting.