Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. That's why when we briefly looked at Dicker Data's (ASX:DDR) ROCE trend, we were very happy with what we saw.

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. Analysts use this formula to calculate it for Dicker Data:

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

0.44 = AU$124m ÷ (AU$1.1b - AU$785m) (Based on the trailing twelve months to June 2023).

Therefore, Dicker Data has an ROCE of 44%. In absolute terms that's a great return and it's even better than the Electronic industry average of 16%.

See our latest analysis for Dicker Data

In the above chart we have measured Dicker Data's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Dicker Data.

So How Is Dicker Data's ROCE Trending?

In terms of Dicker Data's history of ROCE, it's quite impressive. The company has employed 128% more capital in the last five years, and the returns on that capital have remained stable at 44%. Returns like this are the envy of most businesses and given it has repeatedly reinvested at these rates, that's even better. If Dicker Data can keep this up, we'd be very optimistic about its future.

On a separate but related note, it's important to know that Dicker Data has a current liabilities to total assets ratio of 74%, which we'd consider pretty high. 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. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

What We Can Learn From Dicker Data's ROCE

In short, we'd argue Dicker Data has the makings of a multi-bagger since its been able to compound its capital at very profitable rates of return. On top of that, the stock has rewarded shareholders with a remarkable 399% return to those who've held over the last five years. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.

Dicker Data does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those doesn't sit too well with us...

Dicker Data is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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.