Is Delek Royalties (2012) (TLV:DLRL) Shrinking?

Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. Having said that, after a brief look, Delek Royalties (2012) (TLV:DLRL) we aren't filled with optimism, but let's investigate further.

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. To calculate this metric for Delek Royalties (2012), this is the formula:

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

0.11 = US$18m ÷ (US$166m - US$12m) (Based on the trailing twelve months to September 2020).

So, Delek Royalties (2012) has an ROCE of 11%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Oil and Gas industry average of 12%.

Check out our latest analysis for Delek Royalties (2012)

Historical performance is a great place to start when researching a stock so above you can see the gauge for Delek Royalties (2012)'s ROCE against it's prior returns. If you're interested in investigating Delek Royalties (2012)'s past further, check out this free graph of past earnings, revenue and cash flow.

So How Is Delek Royalties (2012)'s ROCE Trending?

In terms of Delek Royalties (2012)'s historical ROCE movements, the trend doesn't inspire confidence. About one year ago, returns on capital were 20%, 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. 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 one year. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Delek Royalties (2012) becoming one if things continue as they have.

The Key Takeaway

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. It should come as no surprise then that the stock has fallen 35% over the last year, so it looks like investors are recognizing these changes. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

If you want to know some of the risks facing Delek Royalties (2012) we've found 3 warning signs (1 is significant!) that you should be aware of before investing here.

While Delek Royalties (2012) 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. 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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