Did you know there are some financial metrics that can provide clues of a potential multi-bagger? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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. With that in mind, we've noticed some promising trends at Dyna-Mac Holdings (SGX:NO4) so let's look a bit deeper.

Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Dyna-Mac Holdings, this is the formula:

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

0.16 = S$18m ÷ (S$345m - S$229m) (Based on the trailing twelve months to December 2023).

Therefore, Dyna-Mac Holdings has an ROCE of 16%. On its own, that's a standard return, however it's much better than the 11% generated by the Energy Services industry.

In the above chart we have measured Dyna-Mac Holdings' prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Dyna-Mac Holdings for free.

The Trend Of ROCE

Shareholders will be relieved that Dyna-Mac Holdings has broken into profitability. The company now earns 16% on its capital, because five years ago it was incurring losses. While returns have increased, the amount of capital employed by Dyna-Mac Holdings has remained flat over the period. So while we're happy that the business is more efficient, just keep in mind that could mean that going forward the business is lacking areas to invest internally for growth. So if you're looking for high growth, you'll want to see a business's capital employed also increasing.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Effectively this means that suppliers or short-term creditors are now funding 66% of the business, which is more than it was five years ago. And with current liabilities at those levels, that's pretty high.

What We Can Learn From Dyna-Mac Holdings' ROCE

To sum it up, Dyna-Mac Holdings is collecting higher returns from the same amount of capital, and that's impressive. Since the stock has returned a staggering 333% to shareholders over the last five years, it looks like investors are recognizing these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

On the other side of ROCE, we have to consider valuation. That's why we have a FREE intrinsic value estimation for NO4 on our platform that is definitely worth checking out.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com