To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at the ROCE trend of Dropbox (NASDAQ:DBX) we really liked what we saw.
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 Dropbox is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.20 = US$357m ÷ (US$3.0b - US$1.2b) (Based on the trailing twelve months to September 2023).
So, Dropbox has an ROCE of 20%. That's a fantastic return and not only that, it outpaces the average of 8.5% earned by companies in a similar industry.
Check out our latest analysis for Dropbox
Above you can see how the current ROCE for Dropbox 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 report on analyst forecasts for the company.
The Trend Of ROCE
We're delighted to see that Dropbox is reaping rewards from its investments and is now generating some pre-tax profits. The company was generating losses five years ago, but now it's earning 20% which is a sight for sore eyes. And unsurprisingly, like most companies trying to break into the black, Dropbox is utilizing 124% more capital than it was five years ago. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.
On a related note, the company's ratio of current liabilities to total assets has decreased to 40%, which basically reduces it's funding from the likes of short-term creditors or suppliers. This tells us that Dropbox has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.
In Conclusion...
In summary, it's great to see that Dropbox has managed to break into profitability and is continuing to reinvest in its business. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 14% to shareholders. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.
Dropbox does have some risks, we noticed 4 warning signs (and 2 which shouldn't be ignored) we think you should know about.
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.