What trends should we look for it we want to identify stocks that can multiply in value over the long term? Typically, we’ll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. With that in mind, the ROCE of Dino Polska (WSE:DNP) looks great, so lets see what the trend can tell us.
What is Return On Capital Employed (ROCE)?
If you haven’t worked with ROCE before, it measures the ‘return’ (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Dino Polska, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.26 = zł993m ÷ (zł6.1b – zł2.2b) (Based on the trailing twelve months to September 2021).
Thus, Dino Polska has an ROCE of 26%. In absolute terms that’s a great return and it’s even better than the Consumer Retailing industry average of 11%.
In the above chart we have measured Dino Polska’s prior ROCE against its prior performance, but the future is arguably more important. If you’d like, you can check out the forecasts from the analysts covering Dino Polska here for free.
What The Trend Of ROCE Can Tell Us
Investors would be pleased with what’s happening at Dino Polska. The data shows that returns on capital have increased substantially over the last five years to 26%. The amount of capital employed has increased too, by 252%. So we’re very much inspired by what we’re seeing at Dino Polska thanks to its ability to profitably reinvest capital.
The Bottom Line
In summary, it’s great to see that Dino Polska can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. Since the stock has returned a staggering 233% to shareholders over the last three years, it looks like investors are recognizing these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.
Dino Polska does have some risks, we noticed 2 warning signs (and 1 which is a bit unpleasant) we think you should know about.
If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.
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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.