Danieli & C. Officine Meccaniche (BIT:DAN) seeks to continue to increase its returns on capital

If you’re not sure where to start when looking for the next multi-bagger, there are a few key trends you should watch out for. Among other things, we will want to see two things; first, growth to return to on capital employed (ROCE) and on the other hand, an expansion of the quantity capital employed. Ultimately, this demonstrates that this is a company that reinvests its earnings at increasing rates of return. With this in mind, we have noticed some promising trends in Danieli & C. Officine Meccaniche (BIT:DAN) so let’s look a little deeper.

Return on capital employed (ROCE): what is it?

For those unaware, ROCE is a measure of a company’s annual pre-tax profit (yield), relative to the capital employed in the business. To calculate this metric for Danieli & C. Officine Meccaniche, here is the formula:

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

0.061 = €151m ÷ (€5.5bn – €3.0bn) (Based on the last twelve months to June 2021).

So, Danieli & C. Officine Meccaniche has a ROCE of 6.1%. Even though it’s in line with the industry average of 6.5%, it’s still a poor performer on its own.

See our latest analysis for Danieli & C. Officine Meccaniche

BIT:DAN Return on Capital Employed January 27, 2022

Above, you can see how Danieli & C. Officine Meccaniche’s current ROCE compares to its past returns on capital, but you can’t tell much about the past. If you wish, you can view analyst forecasts covering Danieli & C. Officine Meccaniche here for free.

What the ROCE trend can tell us

Danieli & C. Officine Meccaniche’s ROCE growth is quite impressive. Specifically, while the company has maintained relatively stable capital employed over the past five years, ROCE has climbed 27% over the same period. It is therefore likely that the company is now reaping all the benefits of its past investments, since the capital employed has not changed much. It’s worth digging into this though, because while it’s great that the business is more efficient, it could also mean that going forward, areas to invest in internally for organic growth are lacking.

Something else to note, Danieli & C. Officine Meccaniche has a high ratio of current liabilities to total assets of 55%. This effectively means that suppliers (or short-term creditors) finance a large part of the business, so just be aware that this may introduce some elements of risk. Ideally, we would like this to decrease, as this would mean fewer risky bonds.

The essential

As noted above, Danieli & C. Officine Meccaniche appears to be becoming more efficient at generating returns as capital employed has remained stable but earnings (before interest and taxes) are up. Given that the stock has only returned 28% to shareholders over the past five years, the promising fundamentals may not yet be recognized by investors. Given this, we would take a closer look at this stock in case it has more traits that can make it multiply in the long run.

While Danieli & C. Officine Meccaniche sounds impressive, no company is worth an infinite price. The intrinsic value infographic of our free The research report shows whether DAN is currently trading at a fair price.

If you want to look for strong companies with excellent earnings, check out this free list of companies with strong balance sheets and impressive returns on equity.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

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