S.T. Dupont (EPA:DPT) Could Be Struggling To Allocate Capital

If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? 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. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. And from a first read, things don't look too good at S.T. Dupont (EPA:DPT), so let's see why.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed 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)

0.015 = €489k ÷ (€53m - €21m) (Based on the trailing twelve months to September 2023).

Therefore, S.T. Dupont has an ROCE of 1.5%. Ultimately, that's a low return and it under-performs the Luxury industry average of 22%.

View our latest analysis for S.T. Dupont

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.

How Are Returns Trending?

In terms of S.T. Dupont's historical ROCE trend, it isn't fantastic. To be more specific, today's ROCE was 3.9% five years ago but has since fallen to 1.5%. On top of that, the business is utilizing 20% less capital within its operations. When you see both ROCE and capital employed diminishing, it can often be a sign of a mature and shrinking business that might be in structural decline. Typically businesses that exhibit these characteristics aren't the ones that tend to multiply over the long term, because statistically speaking, they've already gone through the growth phase of their life cycle.

What We Can Learn From S.T. Dupont's ROCE

In summary, it's unfortunate that S.T. Dupont 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 24% 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.

One more thing: We've identified 3 warning signs with S.T. Dupont (at least 2 which are a bit concerning) , and understanding them would certainly be useful.

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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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.