To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. With that in mind, we've noticed some promising trends at Driver Group (LON:DRV) so let's look a bit deeper.
Return On Capital Employed (ROCE): What Is It?
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Driver Group is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.072 = UK£1.5m ÷ (UK£31m - UK£9.9m) (Based on the trailing twelve months to March 2022).
So, Driver Group has an ROCE of 7.2%. On its own that's a low return on capital but it's in line with the industry's average returns of 7.2%.
View our latest analysis for Driver Group
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're interested in investigating Driver Group's past further, check out this free graph of past earnings, revenue and cash flow.
What Does the ROCE Trend For Driver Group Tell Us?
Driver Group is showing promise given that its ROCE is trending up and to the right. The figures show that over the last five years, ROCE has grown 2,260% whilst employing roughly the same amount of capital. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.
The Key Takeaway
To bring it all together, Driver Group has done well to increase the returns it's generating from its capital employed. Given the stock has declined 26% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. That being the case, research into the company's current valuation metrics and future prospects seems fitting.
Driver Group does have some risks, we noticed 4 warning signs (and 2 which make us uncomfortable) we think you should know about.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.