Did you know there are some financial metrics that can provide clues of a potential multi-bagger? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. 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 Davis Commodities (NASDAQ:DTCK) so let’s look a bit deeper.
Understanding Return On Capital Employed (ROCE)
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. Analysts use this formula to calculate it for Davis Commodities:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.11 = US$1.1m ÷ (US$30m – US$19m) (Based on the trailing twelve months to December 2023).
Thus, Davis Commodities has an ROCE of 11%. In absolute terms, that’s a pretty normal return, and it’s somewhat close to the Consumer Retailing industry average of 9.8%.
See our latest analysis for Davis Commodities
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you’re interested in investigating Davis Commodities’ past further, check out this free graph covering Davis Commodities’ past earnings, revenue and cash flow.
What Does the ROCE Trend For Davis Commodities Tell Us?
The fact that Davis Commodities is now generating some pre-tax profits from its prior investments is very encouraging. Shareholders would no doubt be pleased with this because the business was loss-making three years ago but is is now generating 11% on its capital. And unsurprisingly, like most companies trying to break into the black, Davis Commodities is utilizing 335% more capital than it was three years ago. 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.
One more thing to note, Davis Commodities has decreased current liabilities to 64% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. Therefore we can rest assured that the growth in ROCE is a result of the business’ fundamental improvements, rather than a cooking class featuring this company’s books. Nevertheless, there are some potential risks the company is bearing with current liabilities that high, so just keep that in mind.
What We Can Learn From Davis Commodities’ ROCE
Overall, Davis Commodities gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. Astute investors may have an opportunity here because the stock has declined 65% in the last year. So researching this company further and determining whether or not these trends will continue seems justified.
One more thing: We’ve identified 4 warning signs with Davis Commodities (at least 1 which is potentially serious) , and understanding them would certainly be useful.
While Davis Commodities isn’t earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.