Yahoo Finance Dell Technologies' (NYSE:DELL) Returns On Capital Are Heading Higher
If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Speaking of which, we noticed some great changes in Dell Technologies' (NYSE:DELL) returns on capital, so let's have a look.
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. The formula for this calculation on Dell Technologies is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.083 = US$5.6b ÷ (US$122b - US$55b) (Based on the trailing twelve months to April 2021).
Thus, Dell Technologies has an ROCE of 8.3%. Even though it's in line with the industry average of 8.3%, it's still a low return by itself.
Check out our latest analysis for Dell Technologies
Above you can see how the current ROCE for Dell Technologies 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 Does the ROCE Trend For Dell Technologies Tell Us?
We're delighted to see that Dell Technologies is reaping rewards from its investments and is now generating some pre-tax profits. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 8.3% on its capital. And unsurprisingly, like most companies trying to break into the black, Dell Technologies is utilizing 227% more capital than it was five years ago. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.
On a separate but related note, it's important to know that Dell Technologies has a current liabilities to total assets ratio of 45%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.
Our Take On Dell Technologies' ROCE
To the delight of most shareholders, Dell Technologies has now broken into profitability. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 61% return over the last year. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.
On a final note, we found 4 warning signs for Dell Technologies (1 makes us a bit uncomfortable) you should be aware of.
While Dell Technologies may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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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