If we want to find stocks that can increase in value over the long run, what trends should we be on the lookout for? In an ideal world, we’d like to see businesses pouring more money into their operations and, ideally, seeing rising returns on that investment. This essentially means that a business has lucrative initiatives that it can keep reinvesting in, which is a characteristic of a compounding machine. In light of this, let’s explore what the ROCE of DUG Technology (ASX:DUG) may tell us about the future.
If you haven’t used ROCE before, it calculates the’return’ (pre-tax profit) a business makes on the capital it uses to operate. It is determined by analysts using the following formula for DUG Technology:
(US$47m – US$15m)/0.27 = US$8.7m (Based on the previous 12 months ending in June 2023).
DUG Technology hence has a 27% ROCE. That’s a tremendous return, and on top of that, it beats the industry average of 11% earned by businesses.
We are happy to see that DUG Technology is beginning to turn a profit and is reaping the benefits of its investments. The company was once unprofitable, but things have since changed, and it is now returning 27% of its investment. Additionally, what’s intriguing is that the capital employed has remained constant, so the company hasn’t had to invest any more money to get these greater returns. With no discernible increase in capital utilised, it’s important to understand the company’s future intentions for reinvesting and expanding the firm. Because an organisation can only get so efficient in the end.
As previously mentioned, DUG Technology looks to be improving its ability to produce returns as evidenced by the fact that while capital employed has stayed stable, earnings (before interest and tax) have increased. And you could argue that these improvements are starting to get the attention they deserve given the impressive 44% paid to investors who held the stock over the previous three years. Given that the stock has demonstrated that it has positive patterns, it is worthwhile to further investigate the business to determine whether these trends are likely to continue.
Our articles are not meant to be financial advice; instead, we only offer analysis based on objective methods, historical data, and analyst forecasts. It doesn’t represent an advice to buy or sell any stock, and it doesn’t take into consideration your goals or financial position. We hope to provide you with long-term analysis that is driven by essential facts. Be aware that recent price-sensitive company announcements or high-quality information may not be taken into account in our analysis. No stock mentioned has any positions held by Simply Wall St.