Here's What To Make Of discoverIE Group's (LON:DSCV) Decelerating Rates Of Return

Simply Wall St
2 min read
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If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after investigating discoverIE Group (LON:DSCV), we don't think it's current trends fit the mold of a multi-bagger.

Return On Capital Employed (ROCE): What Is It?

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. To calculate this metric for discoverIE Group, this is the formula:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.068 = UK£27m ÷ (UK£523m - UK£121m) (Based on the trailing twelve months to March 2022).

So, discoverIE Group has an ROCE of 6.8%. Ultimately, that's a low return and it under-performs the Electrical industry average of 15%.

See our latest analysis for discoverIE Group

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In the above chart we have measured discoverIE Group's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering discoverIE Group here for free.

What Can We Tell From discoverIE Group's ROCE Trend?

The returns on capital haven't changed much for discoverIE Group in recent years. Over the past five years, ROCE has remained relatively flat at around 6.8% and the business has deployed 109% more capital into its operations. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

Our Take On discoverIE Group's ROCE

Long story short, while discoverIE Group has been reinvesting its capital, the returns that it's generating haven't increased. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 141% gain to shareholders who have held over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

One more thing to note, we've identified 1 warning sign with discoverIE Group and understanding this should be part of your investment process.

While discoverIE Group isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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