To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at DSW Capital (LON:DSW) and its ROCE trend, we weren't exactly thrilled.
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. To calculate this metric for DSW Capital, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.015 = UK£114k ÷ (UK£8.3m - UK£555k) (Based on the trailing twelve months to September 2024).
Therefore, DSW Capital has an ROCE of 1.5%. In absolute terms, that's a low return and it also under-performs the Professional Services industry average of 17%.
View our latest analysis for DSW Capital
Above you can see how the current ROCE for DSW Capital 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 analyst report for DSW Capital .
When we looked at the ROCE trend at DSW Capital, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 1.5% from 49% five years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.
On a related note, DSW Capital has decreased its current liabilities to 6.7% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.
To conclude, we've found that DSW Capital is reinvesting in the business, but returns have been falling. And investors appear hesitant that the trends will pick up because the stock has fallen 39% in the last three years. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.