To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. This shows us that it’s a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at Dana (NYSE:DAN), it didn’t seem to tick all of these boxes.
What Is Return On Capital Employed (ROCE)?
Just to clarify if you’re unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Dana, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.053 = US$267m ÷ (US$7.9b – US$2.9b) (Based on the trailing twelve months to March 2023).
Therefore, Dana has an ROCE of 5.3%. Ultimately, that’s a low return and it under-performs the Auto Components industry average of 12%.
View our latest analysis for Dana
Above you can see how the current ROCE for Dana compares to its prior returns on capital, but there’s only so much you can tell from the past. If you’d like to see what analysts are forecasting going forward, you should check out our free report for Dana.
How Are Returns Trending?
In terms of Dana’s historical ROCE movements, the trend isn’t fantastic. Around five years ago the returns on capital were 14%, but since then they’ve fallen to 5.3%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.
In Conclusion…
In summary, despite lower returns in the short term, we’re encouraged to see that Dana is reinvesting for growth and has higher sales as a result. However, despite the promising trends, the stock has fallen 39% over the last five years, so there might be an opportunity here for astute investors. As a result, we’d recommend researching this stock further to uncover what other fundamentals of the business can show us.
On a final note, we found 2 warning signs for Dana (1 shouldn’t be ignored) you should be aware of.
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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.
Join A Paid User Research Session
You’ll receive a US$30 Amazon Gift card for 1 hour of your time while helping us build better investing tools for the individual investors like yourself. Sign up here