Returns On Capital At Daldrup & Söhne (ETR:4DS) Paint A Concerning Picture

What underlying fundamental trends can indicate that a company might be in decline? 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. 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. And from a first read, things don't look too good at Daldrup & Söhne (ETR:4DS), so let's see why.

What is Return On Capital Employed (ROCE)?

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. The formula for this calculation on Daldrup & Söhne is:

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

0.012 = €269k ÷ (€38m - €16m) (Based on the trailing twelve months to June 2021).

Therefore, Daldrup & Söhne has an ROCE of 1.2%. In absolute terms, that's a low return and it also under-performs the Energy Services industry average of 5.4%.

Check out our latest analysis for Daldrup & Söhne

In the above chart we have measured Daldrup & Söhne'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 Daldrup & Söhne.

The Trend Of ROCE

The trend of ROCE at Daldrup & Söhne is showing some signs of weakness. Unfortunately, returns have declined substantially over the last five years to the 1.2% we see today. What's equally concerning is that the amount of capital deployed in the business has shrunk by 69% over that same period. 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.

On a side note, Daldrup & Söhne's current liabilities have increased over the last five years to 41% of total assets, effectively distorting the ROCE to some degree. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. And with current liabilities at these levels, suppliers or short-term creditors are effectively funding a large part of the business, which can introduce some risks.

The Bottom Line On Daldrup & Söhne's ROCE

To see Daldrup & Söhne reducing the capital employed in the business in tandem with diminishing returns, is concerning. Long term shareholders who've owned the stock over the last five years have experienced a 18% depreciation in their investment, so it appears the market might not like these trends either. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

On a final note, we've found 3 warning signs for Daldrup & Söhne that we think you should be aware of.

While Daldrup & Söhne 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. 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.