What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. 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 Downer EDI's (ASX:DOW) returns on capital, so let's have a look.

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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 Downer EDI is:

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

0.12 = AU$376m ÷ (AU$6.5b - AU$3.4b) (Based on the trailing twelve months to June 2025).

Thus, Downer EDI has an ROCE of 12%.  That's a pretty standard return and it's in line with the industry average of 12%.

See our latest analysis for Downer EDI ASX:DOW Return on Capital Employed October 18th 2025

In the above chart we have measured Downer EDI's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our freeanalyst report for Downer EDI .

What Does the ROCE Trend For Downer EDI Tell Us?

Downer EDI has not disappointed in regards to ROCE growth. The figures show that over the last five years, returns on capital have grown by 370%. The company is now earning AU$0.1 per dollar of capital employed. Interestingly, the business may be becoming more efficient because it's applying 43% less capital than it was five years ago. A business that's shrinking its asset base like this isn't usually typical of a soon to be multi-bagger company.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Essentially the business now has suppliers or short-term creditors funding about 52% of its operations, which isn't ideal. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.

The Bottom Line On Downer EDI's ROCE

In summary, it's great to see that Downer EDI has been able to turn things around and earn higher returns on lower amounts of capital. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 90% return over the last five years. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

Story Continues

If you want to continue researching Downer EDI, you might be interested to know about the 2 warning signsthat our analysis has discovered.

For those who like to invest in solid companies, check out this freelist of companies with solid balance sheets and high returns on equity.

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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.

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