What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at the ROCE trend of Destination XL Group (NASDAQ:DXLG) we really liked what we saw.
Understanding Return On Capital Employed (ROCE)
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 Destination XL Group is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.33 = US$63m ÷ (US$287m – US$94m) (Based on the trailing twelve months to April 2022).
So, Destination XL Group has an ROCE of 33%. In absolute terms that’s a great return and it’s even better than the Specialty Retail industry average of 18%.
Above you can see how the current ROCE for Destination XL Group compares to its prior returns on capital, but there’s only so much you can tell from the past. If you’d like, you can check out the forecasts from the analysts covering Destination XL Group here for free.
What The Trend Of ROCE Can Tell Us
Destination XL Group has recently broken into profitability so their prior investments seem to be paying off. About five years ago the company was generating losses but things have turned around because it’s now earning 33% on its capital. And unsurprisingly, like most companies trying to break into the black, Destination XL Group is utilizing 31% more capital than it was five years ago. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.
In another part of our analysis, we noticed that the company’s ratio of current liabilities to total assets decreased to 33%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. So this improvement in ROCE has come from the business’ underlying economics, which is great to see.
The Bottom Line On Destination XL Group’s ROCE
In summary, it’s great to see that Destination XL Group has managed to break into profitability and is continuing to reinvest in its business. And a remarkable 103% total return over the last five years tells us that investors are expecting more good things to come in the future. Therefore, we think it would be worth your time to check if these trends are going to continue.
If you’d like to know about the risks facing Destination XL Group, we’ve discovered 1 warning sign that you should be aware of.
Destination XL Group is not the only stock earning high returns. If you’d like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.
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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.