Should You Be Happy With Downer EDI Limited’s (ASX:DOW) Performance Lately?

Measuring Downer EDI Limited’s (ASX:DOW) track record of past performance is a useful exercise for investors. It enables us to understand whether or not the company has met or exceed expectations, which is an insightful signal for future performance. Today I will assess DOW’s recent performance announced on 30 June 2018 and weigh these figures against its long-term trend and industry movements.

See our latest analysis for Downer EDI

How Did DOW’s Recent Performance Stack Up Against Its Past?

DOW’s trailing twelve-month earnings (from 30 June 2018) of AU$63.4m has more than halved from AU$172.9m in the prior year. Furthermore, this one-year growth rate has been lower than its average earnings growth rate over the past 5 years of -0.2%, indicating the rate at which DOW is growing has slowed down. Why could this be happening? Let’s examine what’s transpiring with margins and whether the entire industry is facing the same headwind.

Revenue growth over the past few years, has been positive, nevertheless earnings growth has been falling. This suggest that Downer EDI has been ramping up expenses, which is hurting margins and earnings, and is not a sustainable practice. Looking at growth from a sector-level, the Australian commercial services industry has been growing its average earnings by double-digit 46.7% in the past year, and a more muted 8.3% over the past half a decade. This growth is a median of profitable companies of 13 Commercial Services companies in AU including Wellcom Group, SG Fleet Group and Zaige Waste Management Holding Group (AUS). This suggests that whatever uplift the industry is profiting from, Downer EDI has not been able to realize the gains unlike its industry peers.

ASX:DOW Income Statement Export August 29th 18
ASX:DOW Income Statement Export August 29th 18
In terms of returns from investment, Downer EDI has fallen short of achieving a 20% return on equity (ROE), recording 2.2% instead. Furthermore, its return on assets (ROA) of 1.9% is below the AU Commercial Services industry of 7.9%, indicating Downer EDI’s are utilized less efficiently. And finally, its return on capital (ROC), which also accounts for Downer EDI’s debt level, has declined over the past 3 years from 11.7% to 6.8%. This correlates with an increase in debt holding, with debt-to-equity ratio rising from 39.0% to 47.9% over the past 5 years.

What does this mean?

While past data is useful, it doesn’t tell the whole story. Generally companies that experience a prolonged period of decline in earnings are going through some sort of reinvestment phase with the aim of keeping up with the recent industry disruption and expansion. You should continue to research Downer EDI to get a more holistic view of the stock by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for DOW’s future growth? Take a look at our free research report of analyst consensus for DOW’s outlook.
  2. Financial Health: Are DOW’s operations financially sustainable? Balance sheets can be hard to analyze, which is why we’ve done it for you. Check out our financial health checks here.
  3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

NB: Figures in this article are calculated using data from the trailing twelve months from 30 June 2018. This may not be consistent with full year annual report figures.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.