Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. And in light of that, the trends we're seeing at Destination XL Group's (NASDAQ:DXLG) look very promising so lets take a look.
Return On Capital Employed (ROCE): What is it?
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. The formula for this calculation on Destination XL Group is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.26 = US$43m ÷ (US$264m - US$100m) (Based on the trailing twelve months to October 2021).
Therefore, Destination XL Group has an ROCE of 26%. In absolute terms that's a great return and it's even better than the Specialty Retail industry average of 20%.
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.
The Trend Of ROCE
Shareholders will be relieved that Destination XL Group has broken into profitability. The company now earns 26% on its capital, because five years ago it was incurring losses. While returns have increased, the amount of capital employed by Destination XL Group has remained flat over the period. With no noticeable increase in capital employed, it's worth knowing what the company plans on doing going forward in regards to reinvesting and growing the business. Because in the end, a business can only get so efficient.
What We Can Learn From Destination XL Group's ROCE
To sum it up, Destination XL Group is collecting higher returns from the same amount of capital, and that's impressive. Considering the stock has delivered 30% to its stockholders over the last five years, it may be fair to think that investors aren't fully aware of the promising trends yet. So with that in mind, we think the stock deserves further research.
If you want to know some of the risks facing Destination XL Group we've found 4 warning signs (1 shouldn't be ignored!) that you should be aware of before investing here.
If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.
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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.
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