Returns are gaining momentum at Ducommun (NYSE: DCO)
What trends should we look for if we are to identify stocks that can multiply in value over the long term? First, we will want to see a to recover on capital employed (ROCE) which increases and, on the other hand, a based capital employed. Simply put, these types of businesses are dialing machines, which means they continually reinvest their profits at ever higher rates of return. So on that note, Ducommun (NYSE: DCO) looks pretty promising when it comes to its ROI trends.
Understanding Return on Capital Employed (ROCE)
If you’ve never worked with ROCE before, it measures the “return” (profit before tax) that a business generates on capital employed in its business. The formula for this calculation on Ducommun is:
Return on capital employed = Profit before interest and taxes (EBIT) ÷ (Total assets – Current liabilities)
0.07 = US $ 49 million ÷ (US $ 838 million – US $ 134 million) (Based on the last twelve months up to October 2021).
Thereby, Ducommun has a ROCE of 7.0%. In absolute terms, that’s a low return, and it’s also below the aerospace and defense industry average of 9.4%.
See our latest analysis for Ducommun
Above you can see how Ducommun’s current ROCE compares to its past returns on capital, but there is little you can say about the past. If you wish, you can consult the Ducommun analysts’ forecasts here for free.
The ROCE trend
While in absolute terms it’s not a high ROCE, it is promising to see that it has moved in the right direction. The figures show that over the past five years, the returns generated on capital employed have increased significantly to 7.0%. Basically the business earns more per dollar of capital invested and on top of that 64% more capital is also being used now. This may indicate that there are many opportunities to invest capital internally and at increasingly higher rates, a common combination among multi-baggers.
The result on Ducommun’s ROCE
To sum up, Ducommun has proven that it can reinvest in the business and generate higher returns on that capital employed, which is great. Given that the stock has returned a solid 50% to shareholders over the past five years, it’s fair to say that investors are starting to recognize these changes. Therefore, we believe it would be worth checking whether these trends will continue.
Ducommun does involve certain risks, however, we have found 3 warning signs in our investment analysis, and 1 of them is not going too well with us …
Although Ducommun does not currently achieve the highest returns, we have compiled a list of companies that currently generate over 25% return on equity. Check it out free list here.
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