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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? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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. So, when we ran our eye over Dicker Data's (ASX:DDR) trend of ROCE, we really liked what we saw.
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. Analysts use this formula to calculate it for Dicker Data:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.43 = AU$109m ÷ (AU$854m - AU$600m) (Based on the trailing twelve months to December 2021).
So, Dicker Data has an ROCE of 43%. That's a fantastic return and not only that, it outpaces the average of 10% earned by companies in a similar industry.
Check out our latest analysis for Dicker Data
Above you can see how the current ROCE for Dicker Data 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 report on analyst forecasts for the company.
So How Is Dicker Data's ROCE Trending?
Dicker Data deserves to be commended in regards to it's returns. The company has employed 113% more capital in the last five years, and the returns on that capital have remained stable at 43%. Now considering ROCE is an attractive 43%, this combination is actually pretty appealing because it means the business can consistently put money to work and generate these high returns. If Dicker Data can keep this up, we'd be very optimistic about its future.
On a separate but related note, it's important to know that Dicker Data has a current liabilities to total assets ratio of 70%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.
The Bottom Line On Dicker Data's ROCE
In the end, the company has proven it can reinvest it's capital at high rates of returns, which you'll remember is a trait of a multi-bagger. On top of that, the stock has rewarded shareholders with a remarkable 651% return to those who've held over the last five years. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.