If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. In light of that, when we looked at Dolby Laboratories (NYSE:DLB) and its ROCE trend, we weren't exactly thrilled.

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. The formula for this calculation on Dolby Laboratories is:

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

0.11 = US$281m ÷ (US$2.8b - US$314m) (Based on the trailing twelve months to March 2023).

Thus, Dolby Laboratories has an ROCE of 11%. That's a relatively normal return on capital, and it's around the 10% generated by the Software industry.

Check out our latest analysis for Dolby Laboratories

Above you can see how the current ROCE for Dolby Laboratories 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 Dolby Laboratories here for free.

So How Is Dolby Laboratories' ROCE Trending?

Over the past five years, Dolby Laboratories' ROCE and capital employed have both remained mostly flat. This tells us the company isn't reinvesting in itself, so it's plausible that it's past the growth phase. So unless we see a substantial change at Dolby Laboratories in terms of ROCE and additional investments being made, we wouldn't hold our breath on it being a multi-bagger.

The Bottom Line On Dolby Laboratories' ROCE

We can conclude that in regards to Dolby Laboratories' returns on capital employed and the trends, there isn't much change to report on. Since the stock has gained an impressive 42% over the last five years, investors must think there's better things to come. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

One more thing to note, we've identified 1 warning sign with Dolby Laboratories and understanding this should be part of your investment process.

While Dolby Laboratories isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.

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