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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? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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 Domain Holdings Australia (ASX:DHG) and its trend of ROCE, we really liked what we saw.
What Is Return On Capital Employed (ROCE)?
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Domain Holdings Australia is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.066 = AU$93m ÷ (AU$1.5b - AU$81m) (Based on the trailing twelve months to June 2024).
So, Domain Holdings Australia has an ROCE of 6.6%. Ultimately, that's a low return and it under-performs the Interactive Media and Services industry average of 9.3%.
See our latest analysis for Domain Holdings Australia
In the above chart we have measured Domain Holdings Australia'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 Domain Holdings Australia for free.
What Can We Tell From Domain Holdings Australia's ROCE Trend?
Domain Holdings Australia is showing promise given that its ROCE is trending up and to the right. More specifically, while the company has kept capital employed relatively flat over the last five years, the ROCE has climbed 41% in that same time. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.
The Bottom Line On Domain Holdings Australia's ROCE
To bring it all together, Domain Holdings Australia has done well to increase the returns it's generating from its capital employed. Astute investors may have an opportunity here because the stock has declined 19% in the last five years. With that in mind, we believe the promising trends warrant this stock for further investigation.
Before jumping to any conclusions though, we need to know what value we're getting for the current share price. That's where you can check out our FREE intrinsic value estimation for DHG that compares the share price and estimated value.