Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Having said that, from a first glance at DT Midstream (NYSE:DTM) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
Understanding Return On Capital Employed (ROCE)
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 DT Midstream, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.056 = US$473m ÷ (US$8.9b - US$424m) (Based on the trailing twelve months to September 2023).
Thus, DT Midstream has an ROCE of 5.6%. Ultimately, that's a low return and it under-performs the Oil and Gas industry average of 17%.
See our latest analysis for DT Midstream
In the above chart we have measured DT Midstream's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for DT Midstream.
What Does the ROCE Trend For DT Midstream Tell Us?
In terms of DT Midstream's historical ROCE trend, it doesn't exactly demand attention. Over the past four years, ROCE has remained relatively flat at around 5.6% and the business has deployed 108% 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.
On a side note, DT Midstream has done well to reduce current liabilities to 4.8% of total assets over the last four years. Effectively suppliers now fund less of the business, which can lower some elements of risk.
What We Can Learn From DT Midstream's ROCE
In conclusion, DT Midstream has been investing more capital into the business, but returns on that capital haven't increased. Additionally, the stock's total return to shareholders over the last year has been flat, which isn't too surprising. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.
If you want to continue researching DT Midstream, you might be interested to know about the 2 warning signs that our analysis has discovered.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
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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.