If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Typically, we’ll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. However, after investigating Douglas Dynamics (NYSE:PLOW), we don’t think it’s current trends fit the mold of a multi-bagger.
Return On Capital Employed (ROCE): What Is It?
For those that aren’t sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Douglas Dynamics is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.12 = US$55m ÷ (US$617m – US$145m) (Based on the…
