Is Daios Plastics (ATH:DAIOS) Shrinking?

Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. On that note, looking into Daios Plastics (ATH:DAIOS), we weren't too upbeat about how things were going.

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 Daios Plastics is:

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

0.035 = €4.8m ÷ (€156m - €22m) (Based on the trailing twelve months to June 2020).

Therefore, Daios Plastics has an ROCE of 3.6%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 9.6%.

See our latest analysis for Daios Plastics

Historical performance is a great place to start when researching a stock so above you can see the gauge for Daios Plastics' ROCE against it's prior returns. If you're interested in investigating Daios Plastics' past further, check out this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

We are a bit worried about the trend of returns on capital at Daios Plastics. About five years ago, returns on capital were 6.8%, however they're now substantially lower than that as we saw above. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. 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 Daios Plastics becoming one if things continue as they have.

On a related note, Daios Plastics has decreased its current liabilities to 14% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

Our Take On Daios Plastics' ROCE

In summary, it's unfortunate that Daios Plastics is generating lower returns from the same amount of capital. Despite the concerning underlying trends, the stock has actually gained 8.3% over the last five years, so it might be that the investors are expecting the trends to reverse. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

One more thing: We've identified 2 warning signs with Daios Plastics (at least 1 which doesn't sit too well with us) , and understanding these would certainly be useful.

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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