If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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. Speaking of which, we noticed some great changes in DigitalOcean Holdings' (NYSE:DOCN) returns on capital, so let's have a look.

Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for DigitalOcean Holdings, this is the formula:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.081 = US$107m ÷ (US$1.5b - US$220m) (Based on the trailing twelve months to June 2024).

Therefore, DigitalOcean Holdings has an ROCE of 8.1%. Ultimately, that's a low return and it under-performs the IT industry average of 11%.

View our latest analysis for DigitalOcean Holdings

Above you can see how the current ROCE for DigitalOcean Holdings 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 DigitalOcean Holdings for free.

The Trend Of ROCE

The fact that DigitalOcean Holdings is now generating some pre-tax profits from its prior investments is very encouraging. The company was generating losses five years ago, but now it's earning 8.1% which is a sight for sore eyes. In addition to that, DigitalOcean Holdings is employing 541% more capital than previously which is expected of a company that's trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

On a related note, the company's ratio of current liabilities to total assets has decreased to 14%, which basically reduces it's funding from the likes of short-term creditors or suppliers. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books.

Our Take On DigitalOcean Holdings' ROCE

Long story short, we're delighted to see that DigitalOcean Holdings' reinvestment activities have paid off and the company is now profitable. Astute investors may have an opportunity here because the stock has declined 50% in the last three years. With that in mind, we believe the promising trends warrant this stock for further investigation.