What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. With that in mind, we've noticed some promising trends at Destination XL Group (NASDAQ:DXLG) so let's look a bit deeper.

Understanding Return On Capital Employed (ROCE)

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)

0.071 = US$21m ÷ (US$384m - US$83m) (Based on the trailing twelve months to August 2024).

Therefore, Destination XL Group has an ROCE of 7.1%. Ultimately, that's a low return and it under-performs the Specialty Retail industry average of 12%.

Check out our latest analysis for Destination XL Group

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're interested, you can view the analysts predictions in our free analyst report for Destination XL Group .

So How Is Destination XL Group's ROCE Trending?

We're delighted to see that Destination XL Group is reaping rewards from its investments and has now broken into profitability. The company was generating losses five years ago, but has managed to turn it around and as we saw earlier is now earning 7.1%, which is always encouraging. 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.

On a related note, the company's ratio of current liabilities to total assets has decreased to 22%, which basically reduces it's funding from the likes of short-term creditors or suppliers. So this improvement in ROCE has come from the business' underlying economics, which is great to see.

In Conclusion...

In summary, we're delighted to see that Destination XL Group has been able to increase efficiencies and earn higher rates of return on the same amount of capital. And with a respectable 87% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.