What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Speaking of which, we noticed some great changes in Digi International's (NASDAQ:DGII) 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. Analysts use this formula to calculate it for Digi International:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.069 = US$52m ÷ (US$840m - US$89m) (Based on the trailing twelve months to June 2023).
Thus, Digi International has an ROCE of 6.9%. In absolute terms, that's a low return and it also under-performs the Communications industry average of 8.9%.
Check out our latest analysis for Digi International
NasdaqGS:DGII Return on Capital Employed October 10th 2023
Above you can see how the current ROCE for Digi International 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 Digi International Tell Us?
While in absolute terms it isn't a high ROCE, it's promising to see that it has been moving in the right direction. The data shows that returns on capital have increased substantially over the last five years to 6.9%. Basically the business is earning more per dollar of capital invested and in addition to that, 128% more capital is being employed now too. So we're very much inspired by what we're seeing at Digi International thanks to its ability to profitably reinvest capital.
Our Take On Digi International's ROCE
All in all, it's terrific to see that Digi International is reaping the rewards from prior investments and is growing its capital base. And a remarkable 113% total return over the last five years tells us that investors are expecting more good things to come in the future. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.
If you'd like to know about the risks facing Digi International, we've discovered 1 warning sign that you should be aware of.
While Digi International 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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