If you’re not sure where to start when looking for the next multi-bagger, there are a few key trends you should watch out for. First, we’ll want to see proof come back on capital employed (ROCE) which is increasing, and on the other hand, a base capital employed. Ultimately, this demonstrates that this is a company that reinvests its earnings at increasing rates of return. Therefore, when we looked at ROCE trends at Donar Industries (NSE:DONEAR), we liked what we saw.
Return on capital employed (ROCE): what is it?
For those unaware, ROCE is a measure of a company’s annual pre-tax profit (yield), relative to the capital employed in the business. Analysts use this formula to calculate it for Donear Industries:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.31 = ₹510m ÷ (₹6.1b – ₹4.4b) (Based on the last twelve months to June 2022).
So, Donear Industries has a ROCE of 31%. This is a fantastic return and not only that, it exceeds the 14% average earned by companies in a similar industry.
Check out our latest analysis for Donear Industries
Historical performance is a great starting point when researching a stock. So you can see Donear Industries’ ROCE gauge above against its past returns. If you want to investigate Donear Industries’ past further, check out this free chart of past profits, revenue and cash flow.
What does the ROCE trend tell us for Donear Industries?
In terms of Donear Industries’ ROCE history, that’s pretty impressive. The company has consistently gained 31% over the past five years and the capital employed within the company has increased by 44% over this period. With such high returns, it’s great that the company can continually reinvest its money at such attractive rates of return. If Donear Industries can continue like this, we would be very optimistic about its future.
Furthermore, current liabilities of Donear Industries are still quite high at 73% of total assets. This effectively means that suppliers (or short-term creditors) finance a large part of the business, so just be aware that this may introduce some elements of risk. Although this is not necessarily a bad thing, it can be beneficial if this ratio is lower.
The Key Takeaway
In summary, we are pleased to see that Donear Industries has accumulated returns by reinvesting at consistently high rates of return, as these are common characteristics of a multi-bagger. However, over the past five years, the stock has only offered a 10% return to shareholders who have held it during that time. So, to determine if Donear Industries is a multi-bagger going forward, we suggest digging into other company fundamentals.
One more thing: we have identified 3 warning signs with Donear Industries (at least 2 that make us uncomfortable), and understanding them would certainly be helpful.
High yields are a key ingredient to strong performance, so check out our free list of stocks generating high returns on equity with strong balance sheets.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.
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