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What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Speaking of which, we noticed some great changes in Delticom's (ETR:DEX) returns on capital, so let's have a look.
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 Delticom is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.085 = €8.1m ÷ (€233m - €137m) (Based on the trailing twelve months to June 2024).
So, Delticom has an ROCE of 8.5%. Ultimately, that's a low return and it under-performs the Specialty Retail industry average of 11%.
View our latest analysis for Delticom
Above you can see how the current ROCE for Delticom compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Delticom .
What The Trend Of ROCE Can Tell Us
Delticom has recently broken into profitability so their prior investments seem to be paying off. The company was generating losses five years ago, but now it's earning 8.5% which is a sight for sore eyes. In addition to that, Delticom is employing 43% more capital than previously which is expected of a company that's trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.
On a related note, the company's ratio of current liabilities to total assets has decreased to 59%, which basically reduces it's funding from the likes of short-term creditors or suppliers. This tells us that Delticom has grown its returns without a reliance on increasing their current liabilities, which we're very happy with. Nevertheless, there are some potential risks the company is bearing with current liabilities that high, so just keep that in mind.
The Key Takeaway
To the delight of most shareholders, Delticom has now broken into profitability. Given the stock has declined 43% 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.