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Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Dayforce (NYSE:DAY) and its ROCE trend, we weren't exactly thrilled.
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 Dayforce:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.028 = US$106m ÷ (US$8.1b - US$4.3b) (Based on the trailing twelve months to September 2024).
So, Dayforce has an ROCE of 2.8%. In absolute terms, that's a low return and it also under-performs the Professional Services industry average of 15%.
See our latest analysis for Dayforce
Above you can see how the current ROCE for Dayforce compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Dayforce for free.
What Does the ROCE Trend For Dayforce Tell Us?
There are better returns on capital out there than what we're seeing at Dayforce. The company has consistently earned 2.8% for the last five years, and the capital employed within the business has risen 43% in that time. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.
On a side note, Dayforce's current liabilities are still rather high at 53% of total assets. 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. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.
The Bottom Line On Dayforce's ROCE
In summary, Dayforce has simply been reinvesting capital and generating the same low rate of return as before. Additionally, the stock's total return to shareholders over the last five years has been flat, which isn't too surprising. Therefore based on the analysis done in this article, we don't think Dayforce has the makings of a multi-bagger.