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What are the early trends we should look for to identify a stock that could multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after investigating DocCheck (ETR:AJ91), we don't think it's current trends fit the mold of a multi-bagger.
Return On Capital Employed (ROCE): What Is It?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for DocCheck, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.079 = €3.4m ÷ (€56m - €13m) (Based on the trailing twelve months to December 2023).
Therefore, DocCheck has an ROCE of 7.9%. In absolute terms, that's a low return but it's around the Healthcare Services industry average of 9.7%.
Check out our latest analysis for DocCheck
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how DocCheck has performed in the past in other metrics, you can view this free graph of DocCheck's past earnings, revenue and cash flow.
What The Trend Of ROCE Can Tell Us
On the surface, the trend of ROCE at DocCheck doesn't inspire confidence. Around five years ago the returns on capital were 16%, but since then they've fallen to 7.9%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.
The Key Takeaway
From the above analysis, we find it rather worrisome that returns on capital and sales for DocCheck have fallen, meanwhile the business is employing more capital than it was five years ago. In spite of that, the stock has delivered a 2.0% return to shareholders who held over the last five years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.
If you'd like to know about the risks facing DocCheck, we've discovered 3 warning signs that you should be aware of.