When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. More often than not, we’ll see a declining return on capital employed (ROCE) and a declining amount of capital employed. This indicates the company is producing less profit from its investments and its total assets are decreasing. And from a first read, things don’t look too good at dormakaba Holding (VTX:DOKA), so let’s see why.
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. Analysts use this formula to calculate it for dormakaba Holding:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.18 = CHF218m ÷ (CHF2.0b – CHF730m) (Based on the trailing twelve months to June 2024).
Therefore, dormakaba Holding has an ROCE of 18%. That’s a relatively normal return on capital, and it’s around the 16% generated by the Building industry.
See our latest analysis for dormakaba Holding
In the above chart we have measured dormakaba Holding’s prior ROCE against its prior performance, but the future is arguably more important. If you’d like, you can check out the forecasts from the analysts covering dormakaba Holding for free.
There is reason to be cautious about dormakaba Holding, given the returns are trending downwards. To be more specific, the ROCE was 30% five years ago, but since then it has dropped noticeably. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Since returns are falling and the business has the same amount of assets employed, this can suggest it’s a mature business that hasn’t had much growth in the last five years. If these trends continue, we wouldn’t expect dormakaba Holding to turn into a multi-bagger.
All in all, the lower returns from the same amount of capital employed aren’t exactly signs of a compounding machine. In spite of that, the stock has delivered a 5.3% return to shareholders who held over the last five years. Regardless, we don’t like the trends as they are and if they persist, we think you might find better investments elsewhere.
On a separate note, we’ve found 2 warning signs for dormakaba Holding you’ll probably want to know about.
While dormakaba Holding may not currently earn the highest returns, we’ve compiled a list of companies that currently earn more than 25% return on equity. Check out this free list 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.
