DP Aircraft I's (LON:DPA) Returns On Capital Tell Us There Is Reason To Feel Uneasy

To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. This indicates the company is producing less profit from its investments and its total assets are decreasing. In light of that, from a first glance at DP Aircraft I (LON:DPA), we've spotted some signs that it could be struggling, so let's investigate.

Return On Capital Employed (ROCE): What Is It?

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 DP Aircraft I is:

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

0.042 = US$5.9m ÷ (US$151m - US$8.8m) (Based on the trailing twelve months to December 2023).

Therefore, DP Aircraft I has an ROCE of 4.2%. Ultimately, that's a low return and it under-performs the Trade Distributors industry average of 15%.

See our latest analysis for DP Aircraft I

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how DP Aircraft I has performed in the past in other metrics, you can view this free graph of DP Aircraft I's past earnings, revenue and cash flow.

So How Is DP Aircraft I's ROCE Trending?

The trend of returns that DP Aircraft I is generating are raising some concerns. The company used to generate 7.3% on its capital five years ago but it has since fallen noticeably. In addition to that, DP Aircraft I is now employing 67% less capital than it was five years ago. 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. If these underlying trends continue, we wouldn't be too optimistic going forward.

The Bottom Line On DP Aircraft I's ROCE

In summary, it's unfortunate that DP Aircraft I is shrinking its capital base and also generating lower returns. This could explain why the stock has sunk a total of 93% in the last five years. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

DP Aircraft I does have some risks though, and we've spotted 1 warning sign for DP Aircraft I that you might be interested in.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.