DM-KER Zártköruen Muködo Részvénytársaság (BUSE:DMKER) Has Some Difficulty Using Its Capital Effectively

When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. 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 DM-KER Zártköruen Muködo Részvénytársaság (BUSE:DMKER), we weren't too upbeat about how things were going.

Return On Capital Employed (ROCE): What is it?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for DM-KER Zártköruen Muködo Részvénytársaság:

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

0.11 = Ft382m ÷ (Ft8.5b - Ft5.1b) (Based on the trailing twelve months to December 2020).

So, DM-KER Zártköruen Muködo Részvénytársaság has an ROCE of 11%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Trade Distributors industry average of 13%.

See our latest analysis for DM-KER Zártköruen Muködo Részvénytársaság

Historical performance is a great place to start when researching a stock so above you can see the gauge for DM-KER Zártköruen Muködo Részvénytársaság's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of DM-KER Zártköruen Muködo Részvénytársaság, check out these free graphs here.

What Can We Tell From DM-KER Zártköruen Muködo Részvénytársaság's ROCE Trend?

We are a bit worried about the trend of returns on capital at DM-KER Zártköruen Muködo Részvénytársaság. About one year ago, returns on capital were 26%, however they're now substantially lower than that as we saw above. Meanwhile, capital employed in the business has stayed roughly the flat over the period. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on DM-KER Zártköruen Muködo Részvénytársaság becoming one if things continue as they have.

On a side note, DM-KER Zártköruen Muködo Részvénytársaság's current liabilities are still rather high at 60% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

What We Can Learn From DM-KER Zártköruen Muködo Részvénytársaság's ROCE

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. But investors must be expecting an improvement of sorts because over the last yearthe stock has delivered a respectable 50% return. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

If you want to know some of the risks facing DM-KER Zártköruen Muködo Részvénytársaság we've found 5 warning signs (2 are potentially serious!) that you should be aware of before investing here.

While DM-KER Zártköruen Muködo Részvénytársaság may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.
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