Yahoo Finance The Returns On Capital At DMC Global (NASDAQ:BOOM) Don't Inspire Confidence
What trends should we look for it we want to identify stocks that can multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. In light of that, when we looked at DMC Global (NASDAQ:BOOM) and its ROCE trend, we weren't exactly thrilled.
Understanding Return On Capital Employed (ROCE)
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for DMC Global:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.092 = US$68m ÷ (US$860m - US$121m) (Based on the trailing twelve months to March 2024).
Therefore, DMC Global has an ROCE of 9.2%. Ultimately, that's a low return and it under-performs the Energy Services industry average of 12%.
Check out our latest analysis for DMC Global
Above you can see how the current ROCE for DMC Global 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 DMC Global .
What The Trend Of ROCE Can Tell Us
On the surface, the trend of ROCE at DMC Global doesn't inspire confidence. Over the last five years, returns on capital have decreased to 9.2% from 29% five years ago. However it looks like DMC Global might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. 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 side note, DMC Global has done well to pay down its current liabilities to 14% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.
What We Can Learn From DMC Global's ROCE
Bringing it all together, while we're somewhat encouraged by DMC Global's reinvestment in its own business, we're aware that returns are shrinking. Moreover, since the stock has crumbled 81% over the last five years, it appears investors are expecting the worst. Therefore based on the analysis done in this article, we don't think DMC Global has the makings of a multi-bagger.
If you're still interested in DMC Global it's worth checking out our FREE intrinsic value approximation for BOOM to see if it's trading at an attractive price in other respects.
While DMC Global 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.
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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.