Is This A Sign of Things To Come At Black Diamond Group (TSE:BDI)?

What financial metrics can indicate to us that a company is maturing or even in decline? When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. So after glancing at the trends within Black Diamond Group (TSE:BDI), we weren't too hopeful.

Return On Capital Employed (ROCE): What is it?

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 Black Diamond Group is:

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

0.00088 = CA$348k ÷ (CA$426m - CA$34m) (Based on the trailing twelve months to September 2020).

Thus, Black Diamond Group has an ROCE of 0.09%. In absolute terms, that's a low return and it also under-performs the Commercial Services industry average of 7.3%.

See 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, you can check out the forecasts from the analysts covering Black Diamond Group here for free.

The Trend Of ROCE

In terms of Black Diamond Group's historical ROCE trend, it isn't fantastic. The company used to generate 6.2% on its capital five years ago but it has since fallen noticeably. On top of that, the business is utilizing 39% less capital within its operations. The fact that both are shrinking is an indication that the business is going through some tough times. If these underlying trends continue, we wouldn't be too optimistic going forward.

The Bottom Line On Black Diamond Group's ROCE

In summary, it's unfortunate that Black Diamond Group is shrinking its capital base and also generating lower returns. Long term shareholders who've owned the stock over the last five years have experienced a 40% depreciation in their investment, so it appears the market might not like these trends either. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

On a final note, we've found 2 warning signs for Black Diamond Group that we think you should be aware of.

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

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This article by Simply Wall St is general in nature. 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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