In This Article:
Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. However, after briefly looking over the numbers, we don't think Domino's Pizza Enterprises (ASX:DMP) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
Understanding 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. To calculate this metric for Domino's Pizza Enterprises, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.092 = AU$188m ÷ (AU$2.6b - AU$545m) (Based on the trailing twelve months to June 2024).
Thus, Domino's Pizza Enterprises has an ROCE of 9.2%. Even though it's in line with the industry average of 9.3%, it's still a low return by itself.
View our latest analysis for Domino's Pizza Enterprises
In the above chart we have measured Domino's Pizza Enterprises' 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 Domino's Pizza Enterprises for free.
What Can We Tell From Domino's Pizza Enterprises' ROCE Trend?
In terms of Domino's Pizza Enterprises' historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 17% over the last five years. 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.
The Bottom Line
Bringing it all together, while we're somewhat encouraged by Domino's Pizza Enterprises' 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 39% in the last five years. Therefore based on the analysis done in this article, we don't think Domino's Pizza Enterprises has the makings of a multi-bagger.