If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. And from a first read, things don't look too good at S.T. Dupont (EPA:DPT), so let's see why.
Understanding Return On Capital Employed (ROCE)
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 S.T. Dupont is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.00082 = €38k ÷ (€75m - €30m) (Based on the trailing twelve months to September 2019).
So, S.T. Dupont has an ROCE of 0.08%. In absolute terms, that's a low return and it also under-performs the Luxury industry average of 11%.
Historical performance is a great place to start when researching a stock so above you can see the gauge for S.T. Dupont's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of S.T. Dupont, check out these free graphs here.
So How Is S.T. Dupont's ROCE Trending?
In terms of S.T. Dupont's historical ROCE movements, the trend doesn't inspire confidence. About five years ago, returns on capital were 7.1%, however they're now substantially lower than that as we saw above. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on S.T. Dupont becoming one if things continue as they have.
The Bottom Line On S.T. Dupont's ROCE
In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. Investors haven't taken kindly to these developments, since the stock has declined 44% from where it was five years ago. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.
S.T. Dupont does come with some risks though, we found 3 warning signs in our investment analysis, and 2 of those can't be ignored...
While S.T. Dupont 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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