Yahoo Finance Returns At DigitalX (ASX:DCC) Are On The Way Up
If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So on that note, DigitalX (ASX:DCC) looks quite promising in regards to its trends of return on capital.
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 DigitalX:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.085 = AU$6.1m ÷ (AU$73m - AU$1.1m) (Based on the trailing twelve months to December 2021).
So, DigitalX has an ROCE of 8.5%. In absolute terms, that's a low return and it also under-performs the Software industry average of 13%.
View our latest analysis for DigitalX
Historical performance is a great place to start when researching a stock so above you can see the gauge for DigitalX's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of DigitalX, check out these free graphs here.
The Trend Of ROCE
DigitalX has recently broken into profitability so their prior investments seem to be paying off. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 8.5% on its capital. And unsurprisingly, like most companies trying to break into the black, DigitalX is utilizing 4,107% more capital than it was five 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 1.5%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. This tells us that DigitalX has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.
The Bottom Line On DigitalX's ROCE
To the delight of most shareholders, DigitalX has now broken into profitability. Since the stock has only returned 35% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.
DigitalX does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those is significant...
While DigitalX 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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.
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