Dixons Carphone (LON:DC.) Will Be Hoping To Turn Its Returns On Capital Around

When we're researching a company, it's sometimes hard to find the warning signs, but there are some financial metrics that can help spot trouble early. Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. This indicates the company is producing less profit from its investments and its total assets are decreasing. On that note, looking into Dixons Carphone (LON:DC.), we weren't too upbeat about how things were going.

Understanding 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. To calculate this metric for Dixons Carphone, this is the formula:

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

0.058 = UK£257m ÷ (UK£7.6b - UK£3.2b) (Based on the trailing twelve months to October 2020).

Therefore, Dixons Carphone has an ROCE of 5.8%. Ultimately, that's a low return and it under-performs the Specialty Retail industry average of 10%.

View our latest analysis for Dixons Carphone

In the above chart we have measured Dixons Carphone's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Dixons Carphone.

So How Is Dixons Carphone's ROCE Trending?

We are a bit worried about the trend of returns on capital at Dixons Carphone. About five years ago, returns on capital were 8.1%, 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. If these trends continue, we wouldn't expect Dixons Carphone to turn into a multi-bagger.

On a separate but related note, it's important to know that Dixons Carphone has a current liabilities to total assets ratio of 42%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

Our Take On Dixons Carphone's ROCE

In summary, it's unfortunate that Dixons Carphone is generating lower returns from the same amount of capital. It should come as no surprise then that the stock has fallen 59% over the last five years, so it looks like investors are recognizing these changes. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

Dixons Carphone does have some risks though, and we've spotted 1 warning sign for Dixons Carphone 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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