If you're looking for a multi-bagger, there's a few things to keep an eye out 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. Having said that, from a first glance at dotdigital Group (LON:DOTD) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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. To calculate this metric for dotdigital Group, this is the formula:

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

0.16 = UK£13m ÷ (UK£94m - UK£13m) (Based on the trailing twelve months to December 2022).

Thus, dotdigital Group has an ROCE of 16%.  In absolute terms, that's a satisfactory return, but compared to the Software industry average of 9.6% it's much better.

View our latest analysis for dotdigital Group  roce

Above you can see how the current ROCE for dotdigital Group compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our freereport on analyst forecasts for the company.

The Trend Of ROCE

In terms of dotdigital Group's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 16% from 25% five years ago. However it looks like dotdigital Group might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

What We Can Learn From dotdigital Group's ROCE

To conclude, we've found that dotdigital Group is reinvesting in the business, but returns have been falling. Unsurprisingly then, the total return to shareholders over the last five years has been flat. Therefore based on the analysis done in this article, we don't think dotdigital Group has the makings of a multi-bagger.

dotdigital Group could be trading at an attractive price in other respects, so you might find our  free intrinsic value estimation on our platform quite valuable.

While dotdigital Group isn't earning the highest return, check out this freelist of companies that are earning high returns on equity with solid balance sheets.

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.

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