Capital Investments At Doximity (NYSE:DOCS) Point To A Promising Future
If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. That’s why when we briefly looked at Doximity’s (NYSE:DOCS) ROCE trend, we were very happy with what we saw.
Understanding Return On Capital Employed (ROCE)
For those who don’t know, ROCE is a measure of a company’s yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Doximity:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.20 = US$189m ÷ (US$1.1b – US$135m) (Based on the trailing twelve months to June 2024).
Thus, Doximity has an ROCE of 20%. That’s a fantastic return and not only that, it outpaces the average of 6.0% earned by companies in a similar industry.
View our latest analysis for Doximity
Above you can see how the current ROCE for Doximity 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 free analyst report for Doximity .
What Does the ROCE Trend For Doximity Tell Us?
In terms of Doximity’s history of ROCE, it’s quite impressive. Over the past five years, ROCE has remained relatively flat at around 20% and the business has deployed 1,537% more capital into its operations. Returns like this are the envy of most businesses and given it has repeatedly reinvested at these rates, that’s even better. You’ll see this when looking at well operated businesses or favorable business models.
One more thing to note, even though ROCE has remained relatively flat over the last five years, the reduction in current liabilities to 13% of total assets, is good to see from a business owner’s perspective. This can eliminate some of the risks inherent in the operations because the business has less outstanding obligations to their suppliers and or short-term creditors than they did previously.
What We Can Learn From Doximity’s ROCE
Doximity has demonstrated its proficiency by generating high returns on increasing amounts of capital employed, which we’re thrilled about. However, despite the favorable fundamentals, the stock has fallen 46% over the last three years, so there might be an opportunity here for astute investors. For that reason, savvy investors might want to look further into this company in case it’s a prime investment.
Doximity does have some risks though, and we’ve spotted 1 warning sign for Doximity that you might be interested in.
If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.
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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.