Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we’ll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. If you see this, it typically means it’s a company with a great business model and plenty of profitable reinvestment opportunities. With that in mind, the ROCE of Donaldson Company (NYSE:DCI) looks attractive right now, so lets see what the trend of returns can tell us.
What Is 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 Donaldson Company:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.26 = US$549m ÷ (US$2.9b – US$783m) (Based on the trailing twelve months to July 2024).
So, Donaldson Company has an ROCE of 26%. That’s a fantastic return and not only that, it outpaces the average of 14% earned by companies in a similar industry.
View our latest analysis for Donaldson Company
In the above chart we have measured Donaldson Company’s prior ROCE against its prior performance, but the future is arguably more important. If you’re interested, you can view the analysts predictions in our free analyst report for Donaldson Company .
How Are Returns Trending?
In terms of Donaldson Company’s history of ROCE, it’s quite impressive. The company has employed 28% more capital in the last five years, and the returns on that capital have remained stable at 26%. Now considering ROCE is an attractive 26%, this combination is actually pretty appealing because it means the business can consistently put money to work and generate these high returns. If these trends can continue, it wouldn’t surprise us if the company became a multi-bagger.
The Bottom Line On Donaldson Company’s ROCE
In short, we’d argue Donaldson Company has the makings of a multi-bagger since its been able to compound its capital at very profitable rates of return. Therefore it’s no surprise that shareholders have earned a respectable 52% return if they held over the last five years. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.
On the other side of ROCE, we have to consider valuation. That’s why we have a FREE intrinsic value estimation for DCI on our platform that is definitely worth checking out.
If you’d like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.
