Investors will want Dexco’s (BVMF:DXCO3) ROCE growth to persist
Finding a business that has the potential to grow significantly isn’t easy, but it is possible if we look at a few key financial metrics. Ideally, a business will show two trends; first growth come back on capital employed (ROCE) and on the other hand, growth amount capital employed. This shows us that it is a compounding machine, capable of continuously reinvesting its profits back into the business and generating higher returns. So when we looked Dexco (BVMF:DXCO3) and its ROCE trend, we really liked what we saw.
Return on capital employed (ROCE): what is it?
Just to clarify if you’re not sure, ROCE is a measure of the pre-tax income (as a percentage) that a business earns on the capital invested in its business. Analysts use this formula to calculate it for Dexco:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.084 = R$955 million ÷ (R$15 billion – R$4.0 billion) (Based on the last twelve months to June 2022).
Therefore, Dexco has an ROI of 8.4%. In absolute terms, this is a poor return and it is also below the forest industry average of 13%.
See our latest analysis for Dexco
Above, you can see how Dexco’s current ROCE compares to its past returns on capital, but there’s little you can say about the past. If you want, you can check out analyst forecasts covering Dexco here for free.
The ROCE trend
We are happy to see that the ROCE is heading in the right direction, even if it is still weak at the moment. Over the past five years, return on capital employed has increased substantially to 8.4%. Basically, the business earns more per dollar of invested capital and on top of that, 46% more capital is also utilized now. So we’re very inspired by what we’re seeing at Dexco with its ability to reinvest capital profitably.
For the record though, there was a notable increase in the company’s current liabilities over the period, so we would attribute some of the ROCE growth to that. Current liabilities have increased to 26% of total assets, so the company is now financed more by suppliers or short-term creditors. It’s worth keeping an eye on this because as the percentage of current liabilities to total assets increases, certain aspects of risk also increase.
The Key Takeaway
Overall, it’s great to see Dexco reaping the rewards of past investments and growing its capital. And investors seem to expect more in the future, as the stock has rewarded shareholders with a 64% return over the past five years. Therefore, we think it would be worth checking whether these trends will continue.
On a separate note, we found 3 warning signs for Dexco you will probably want to know more.
While Dexco isn’t currently earning the highest returns, we’ve compiled a list of companies that are currently earning over 25% return on equity. look at this free list here.
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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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