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If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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 D-BOX Technologies (TSE:DBO) so let's look a bit deeper.
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. To calculate this metric for D-BOX Technologies, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.12 = CA$1.8m ÷ (CA$24m - CA$8.4m) (Based on the trailing twelve months to September 2024).
So, D-BOX Technologies has an ROCE of 12%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Consumer Durables industry average of 14%.
Check out our latest analysis for D-BOX Technologies
Historical performance is a great place to start when researching a stock so above you can see the gauge for D-BOX Technologies' ROCE against it's prior returns. If you're interested in investigating D-BOX Technologies' past further, check out this free graph covering D-BOX Technologies' past earnings, revenue and cash flow.
The Trend Of ROCE
Like most people, we're pleased that D-BOX Technologies is now generating some pretax earnings. The company was generating losses five years ago, but now it's turned around, earning 12% which is no doubt a relief for some early shareholders. Additionally, the business is utilizing 33% less capital than it was five years ago, and taken at face value, that can mean the company needs less funds at work to get a return. D-BOX Technologies could be selling under-performing assets since the ROCE is improving.
For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Effectively this means that suppliers or short-term creditors are now funding 35% of the business, which is more than it was five years ago. Keep an eye out for future increases because when the ratio of current liabilities to total assets gets particularly high, this can introduce some new risks for the business.