Black Diamond Group's (TSE:BDI) Returns On Capital Not Reflecting Well On The Business

When we're researching a company, it's sometimes hard to find the warning signs, but there are some financial metrics that can help spot trouble early. A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. So after we looked into Black Diamond Group (TSE:BDI), the trends above didn't look too great.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Black Diamond Group, this is the formula:

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

0.0092 = CA$4.2m ÷ (CA$508m - CA$47m) (Based on the trailing twelve months to March 2021).

So, Black Diamond Group has an ROCE of 0.9%. In absolute terms, that's a low return and it also under-performs the Commercial Services industry average of 8.9%.

View our latest analysis for Black Diamond Group

In the above chart we have measured Black Diamond Group's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Black Diamond Group.

What Does the ROCE Trend For Black Diamond Group Tell Us?

We are a bit anxious about the trends of ROCE at Black Diamond Group. To be more specific, today's ROCE was 2.6% five years ago but has since fallen to 0.9%. What's equally concerning is that the amount of capital deployed in the business has shrunk by 22% over that same period. The fact that both are shrinking is an indication that the business is going through some tough times. Typically businesses that exhibit these characteristics aren't the ones that tend to multiply over the long term, because statistically speaking, they've already gone through the growth phase of their life cycle.

The Bottom Line On Black Diamond Group's ROCE

In short, lower returns and decreasing amounts capital employed in the business doesn't fill us with confidence. Investors haven't taken kindly to these developments, since the stock has declined 20% from where it was five years ago. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

If you'd like to know about the risks facing Black Diamond Group, we've discovered 2 warning signs that you should be aware of.

While Black Diamond Group 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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