This analysis is intended to introduce important early concepts to people who are starting to invest and want to better understand how you can grow your money by investing in Dorel Industries Inc (TSE:DII.B).
Buying Dorel Industries makes you a partial owner of the company. Owing to this, it is important that the underlying business is producing a sufficient amount of income from the capital invested by stockholders. You need to pay attention to this because your return on investment is linked to dividends and internal investments to improve the business, which can only occur if the company is expected to produce adequate earnings with the capital that has been provided. To understand Dorel Industries’s capital returns we will look at a useful metric called return on capital employed. This will tell us if the company is growing your capital and placing you in good stead to sell your shares at a profit.
View our latest analysis for Dorel Industries
Calculating Return On Capital Employed for DII.B
You only have a finite amount of capital to invest, so there are only so many companies that you can add to your portfolio. The cost of missing out on another opportunity comes in the form of the potential long term gain you could’ve received, which is dependent on the gap between the return on capital you could’ve achieved and that of the company you invested in. Hence, capital returns are very important, and should be examined before you invest in conjunction with a certain benchmark that represents the minimum return you require to be compensated for the risk of missing out on other potentially lucrative investments. We’ll look at Dorel Industries’s returns by computing return on capital employed, which will tell us what the company can generate from the money spent in operations. DII.B’s ROCE is calculated below:
ROCE Calculation for DII.B
Return on Capital Employed (ROCE) = Earnings Before Tax (EBT) ÷ (Capital Employed)
Capital Employed = (Total Assets – Current Liabilities)
∴ ROCE = US$57m ÷ (US$2.2b – US$623m) = 5.7%
As you can see, DII.B earned CA$5.7 from every CA$100 you invested over the previous twelve months. This shows Dorel Industries provides a dull capital return that is below the 15% ROCE that is typically considered to be a strong benchmark. Nevertheless, if DII.B is clever with their reinvestments or dividend payments, investors can still grow their capital but may fall behind other more attractive opportunities in the market.
What is causing this?
The underperforming ROCE is not ideal for Dorel Industries investors if the company is unable to turn things around. But if the underlying variables (earnings and capital employed) improve, DII.B’s ROCE may increase, in which case your portfolio could benefit from holding the company. So it is important for investors to understand what is going on under the hood and look at how these variables have been behaving. If you go back three years, you’ll find that DII.B’s ROCE has increased from 5.3%. In this time, earnings have actually fallen from US$95m to US$57m, but the use of capital has fallen further due to a decline in total assets employed , which means that although earnings are smaller than before, DII.B requires less capital to produce each CA$1 of earnings.
Next Steps
Although Dorel Industries’s ROCE is currently below the acceptable benchmark, the company has triggered an upward trend over the recent past which could signal an opportunity for a solid return on investment in the long term. But don’t forget, return on capital employed is a static metric that should be looked at in conjunction with other fundamental indicators like future prospects and valuation to determine whether there is potential for return by focusing our attention elsewhere. Dorel Industries’s fundamentals can be explored with the links I’ve provided below if you are interested, otherwise you can start looking at other high-performing stocks.
- Future Outlook: What are well-informed industry analysts predicting for DII.B’s future growth? Take a look at our free research report of analyst consensus for DII.B’s outlook.
- Valuation: What is DII.B worth today? Despite the unattractive ROCE, is the outlook correctly factored in to the price? The intrinsic value infographic in our free research report helps visualize whether DII.B is currently undervalued by the market.
- 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.
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.