Dr. Martens (LON:DOCS) May Have Issues Allocating Its Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we looked at Dr. Martens (LON:DOCS), it didn't seem to tick all of these boxes.

We've discovered 3 warning signs about Dr. Martens. View them for free.

Understanding 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 Dr. Martens is:

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

0.096 = UK£71m ÷ (UK£932m - UK£193m) (Based on the trailing twelve months to September 2024).

Thus, Dr. Martens has an ROCE of 9.6%. On its own, that's a low figure but it's around the 9.1% average generated by the Luxury industry.

See our latest analysis for Dr. Martens

In the above chart we have measured Dr. Martens' prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Dr. Martens .

What Can We Tell From Dr. Martens' ROCE Trend?

In terms of Dr. Martens' historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 9.6% from 25% five years ago. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

The Key Takeaway

We're a bit apprehensive about Dr. Martens because despite more capital being deployed in the business, returns on that capital and sales have both fallen. We expect this has contributed to the stock plummeting 75% during the last three years. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

If you'd like to know more about Dr. Martens, we've spotted 3 warning signs, and 1 of them shouldn't be ignored.

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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.