If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. So when we looked at Dover Motorsports (NYSE:DVD) and its trend of ROCE, we really liked what we saw.
Return On Capital Employed (ROCE): What is it?
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 Dover Motorsports is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.14 = US$12m ÷ (US$93m - US$8.5m) (Based on the trailing twelve months to September 2020).
Thus, Dover Motorsports has an ROCE of 14%. In absolute terms, that's a satisfactory return, but compared to the Hospitality industry average of 4.6% it's much better.
See our latest analysis for Dover Motorsports
Historical performance is a great place to start when researching a stock so above you can see the gauge for Dover Motorsports' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Dover Motorsports, check out these free graphs here.
What Does the ROCE Trend For Dover Motorsports Tell Us?
Dover Motorsports has broken into the black (profitability) and we're sure it's a sight for sore eyes. The company now earns 14% on its capital, because five years ago it was incurring losses. Interestingly, the capital employed by the business has remained relatively flat, so these higher returns are either from prior investments paying off or increased efficiencies. So while we're happy that the business is more efficient, just keep in mind that could mean that going forward the business is lacking areas to invest internally for growth. Because in the end, a business can only get so efficient.
The Key Takeaway
As discussed above, Dover Motorsports appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. Considering the stock has delivered 32% to its stockholders over the last five years, it may be fair to think that investors aren't fully aware of the promising trends yet. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.