What trends should we look for if we want to identify stocks that can multiply in value over the long term? First, we would like to identify a growth come back on capital employed (ROCE) and at the same time, a base capital employed. Ultimately, this demonstrates that this is a company that reinvests its earnings at increasing rates of return. Therefore, when we briefly examined from the dotdigital group (LON:DOTD) ROCE trend, we were very pleased with what we saw.
What is return on capital employed (ROCE)?
Just to clarify if you’re not sure, ROCE is a measure of the pre-tax income (as a percentage) that a business earns on the capital invested in its business. To calculate this metric for dotdigital Group, here is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.20 = £15m ÷ (£83m – £11m) (Based on the last twelve months to December 2021).
So, dotdigital Group posted a ROCE of 20%. This is a fantastic return and not only that, it exceeds the 7.7% average earned by companies in a similar industry.
Discover our latest analysis for dotdigital Group
Above, you can see how dotdigital Group’s current ROCE compares to its past returns on capital, but there’s little you can say about the past. If you want to see what analysts predict for the future, you should check out our free report for the dotdigital group.
What the ROCE trend can tell us
It’s hard not to be impressed with the returns on capital of dotdigital Group. The company has consistently gained 20% over the past five years and the capital employed within the company has increased by 157% over this period. With such high returns, it’s great that the company can continually reinvest its money at such attractive rates of return. You will see this when you look at well-run businesses or favorable business models.
Our point of view on the ROCE of dotdigital Group
In short, we would say that dotdigital Group has the makings of a multi-bagger since it has been able to compound its capital at very profitable rates of return. So it’s no surprise that shareholders have earned a respectable 44% return if they’ve held for the past five years. So while the stock may be more “expensive” than it used to be, we believe the strong fundamentals warrant this stock for further research.
On the other side of ROCE, we have to consider valuation. That’s why we have a FREE intrinsic value estimation on our platform definitely worth checking out.
dotdigital Group is not the only stock to generate high returns. If you want to see more, check out our free list of companies with high returns on equity with strong fundamentals.
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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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