There are a few key trends to look for if we want to identify the next multi-bagger. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So on that note, Digitalbox (LON:DBOX) looks quite promising in regards to its trends of return on capital.
Return On Capital Employed (ROCE): What is it?
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Digitalbox, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.046 = UK£630k ÷ (UK£15m - UK£1.0m) (Based on the trailing twelve months to December 2021).
Thus, Digitalbox has an ROCE of 4.6%. In absolute terms, that's a low return and it also under-performs the Interactive Media and Services industry average of 16%.
Above you can see how the current ROCE for Digitalbox 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.
What Can We Tell From Digitalbox's ROCE Trend?
The fact that Digitalbox is now generating some pre-tax profits from its prior investments is very encouraging. The company was generating losses three years ago, but now it's earning 4.6% which is a sight for sore eyes. And unsurprisingly, like most companies trying to break into the black, Digitalbox is utilizing 3,270% more capital than it was three years ago. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.
In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 7.1%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. 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.
The Key Takeaway
In summary, it's great to see that Digitalbox has managed to break into profitability and is continuing to reinvest in its business. Since the stock has returned a solid 36% to shareholders over the last three years, it's fair to say investors are beginning to recognize these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.
Digitalbox does have some risks though, and we've spotted 3 warning signs for Digitalbox that you might be interested in.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and 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.