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Did you know there are some financial metrics that can provide clues of a potential multi-bagger? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. With that in mind, we've noticed some promising trends at Digitalbox (LON:DBOX) so let's look a bit deeper.
Understanding Return On Capital Employed (ROCE)
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 Digitalbox is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.077 = UK£887k ÷ (UK£12m - UK£435k) (Based on the trailing twelve months to June 2020).
Therefore, Digitalbox has an ROCE of 7.7%. On its own that's a low return, but compared to the average of 5.8% generated by the Interactive Media and Services industry, it's much better.
See our latest analysis for Digitalbox
Above you can see how the current ROCE for Digitalbox 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 Digitalbox here for free.
The Trend Of ROCE
We're delighted to see that Digitalbox is reaping rewards from its investments and has now broken into profitability. The company was generating losses one year ago, but has managed to turn it around and as we saw earlier is now earning 7.7%, which is always encouraging. 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.
What We Can Learn From Digitalbox's ROCE
To sum it up, Digitalbox is collecting higher returns from the same amount of capital, and that's impressive. Since the total return from the stock has been almost flat over the last year, there might be an opportunity here if the valuation looks good. So researching this company further and determining whether or not these trends will continue seems justified.