What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we’d want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it’s a business that is reinvesting profits at increasing rates of return. So, when we ran our eye over Detection Technology Oyj’s (HEL:DETEC) trend of ROCE, we really liked what we saw.
Understanding Return On Capital Employed (ROCE)
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. The formula for this calculation on Detection Technology Oyj is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.29 = €17m ÷ (€77m – €19m) (Based on the trailing twelve months to December 2019).
Therefore, Detection Technology Oyj has an ROCE of 29%. In absolute terms that’s a great return and it’s even better than the Electronic industry average of 21%.
In the above chart we have a measured Detection Technology Oyj’s prior ROCE against its prior performance, but the future is arguably more important. If you’d like to see what analysts are forecasting going forward, you should check out our free report for Detection Technology Oyj.
How Are Returns Trending?
We’d be pretty happy with returns on capital like Detection Technology Oyj. The company has employed 376% more capital in the last five years, and the returns on that capital have remained stable at 29%. Now considering ROCE is an attractive 29%, this combination is actually pretty appealing because it means the business can consistently put money to work and generate these high returns. You’ll see this when looking at well operated businesses or favorable business models.
On a side note, Detection Technology Oyj has done well to reduce current liabilities to 24% of total assets over the last five years. This can eliminate some of the risks inherent in the operations because the business has less outstanding obligations to their suppliers and or short-term creditors than they did previously.
The Bottom Line
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 318% return to those who’ve 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.
While Detection Technology Oyj looks impressive, no company is worth an infinite price. The intrinsic value infographic in our free research report helps visualize whether DETEC is currently trading for a fair price.
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. 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.
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