Returns On Capital At Dassault Aviation (EPA:AM) Have Hit The Brakes

What trends should we look for it we want to identify stocks that can multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Dassault Aviation (EPA:AM), it didn't seem to tick all of these boxes.

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

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 Dassault Aviation, this is the formula:

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

0.061 = €291m ÷ (€14b - €8.9b) (Based on the trailing twelve months to December 2020).

Thus, Dassault Aviation has an ROCE of 6.1%. Ultimately, that's a low return and it under-performs the Aerospace & Defense industry average of 8.6%.

View our latest analysis for Dassault Aviation

Above you can see how the current ROCE for Dassault Aviation compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Dassault Aviation.

So How Is Dassault Aviation's ROCE Trending?

Things have been pretty stable at Dassault Aviation, with its capital employed and returns on that capital staying somewhat the same for the last five years. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. With that in mind, unless investment picks up again in the future, we wouldn't expect Dassault Aviation to be a multi-bagger going forward.

On a side note, Dassault Aviation's current liabilities are still rather high at 65% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line On Dassault Aviation's ROCE

In summary, Dassault Aviation isn't compounding its earnings but is generating stable returns on the same amount of capital employed. And with the stock having returned a mere 14% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

If you want to continue researching Dassault Aviation, you might be interested to know about the 1 warning sign that our analysis has discovered.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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