What early trends should we look at to identify a stock that could increase in value over the long term? In a perfect world, we would like to see a company investing more capital in its business and ideally increasing the return earned on that capital. This basically means that a company has profitable initiatives in which it can continue to reinvest, which is characteristic of a compounding machine. However after checking Double Verify Holdings (NYSE: DV), we don’t think these current trends fit the mold of a multi-bagger.
Understanding Return on Capital Employed (ROCE)
For those not in the know, ROCE is a measure of a company’s annual pre-tax profit (its return) relative to the capital employed in the business. The formula for this calculation at DoubleVerify Holdings is:
Return on capital employed = Earnings before interest and taxes (EBIT) ÷ (Total assets – Current liabilities)
0.054 = US$51m ÷ (US$1.0b – US$58m) (Based on last twelve months to September 2022),
So, DoubleVerify Holdings’s ROCE is 5.4%. In absolute terms, this is a low return and underperforms the software industry average of 10%.
Check out our latest analysis for DoubleVerify Holdings
Above you can see how the current ROCE for DoubleVerify Holdings compares to its past return on capital, but you can only tell so much from the past. If you’re interested, you can check out the analysts’ predictions in our free Reports on analyst forecasts for the company.
What does the ROCE trend tell us for DoubleVerify Holdings?
When we look at the ROCE trend at DoubleVerify Holdings, we don’t get much confidence. The return on capital was 7.3% about three years ago, but has since fallen to 5.4%. While both capital employed and revenue have increased, it appears that the business is currently developing as a result of short term returns. If these investments prove to be successful, it could bode very well for long-term stock performance.
key results
Even though return on capital may have fallen in the short term, we find it promising that both revenue and capital employed have increased for DoubleVerify Holdings. However, despite the promising trends, the stock has fallen 24% over the past year, so there may be an opportunity here for astute investors. As a result, we recommend doing further research on this stock to see what other business fundamentals might show us.
One more thing, we’ve seen 1 warning sign DoubleVerify Holdings is facing one that you might find interesting.
While DoubleVerify Holdings may not currently be generating the highest returns, we have compiled a list of companies that currently generate over 25% return on equity. check it out free list here.
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find out whether Double Verify Holdings potentially overpriced or underpriced by checking out our comprehensive analysis, which includes Fair Value Estimates, Risks and Warnings, Dividends, Insider Trading and Financial Health.
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This article from Simply Wall St is general in nature. We only provide commentary based on historical data and analyst forecasts using an unbiased methodology and our articles are not intended to provide financial advice. It is not a recommendation to buy or sell any stock, and does not take into account 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 Street has no position in any of the stocks mentioned.
