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 reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. In light of that, from a first glance at Donear Industries (NSE:DONEAR), we've spotted some signs that it could be struggling, so let's investigate.
What is Return On Capital Employed (ROCE)?
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 Donear Industries:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.023 = ₹31m ÷ (₹4.6b - ₹3.3b) (Based on the trailing twelve months to December 2020).
Therefore, Donear Industries has an ROCE of 2.3%. Ultimately, that's a low return and it under-performs the Luxury industry average of 9.4%.
Check out our latest analysis for Donear Industries
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Donear Industries has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
What Does the ROCE Trend For Donear Industries Tell Us?
We are a bit worried about the trend of returns on capital at Donear Industries. Unfortunately the returns on capital have diminished from the 33% that they were earning five years ago. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. 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. If these trends continue, we wouldn't expect Donear Industries to turn into a multi-bagger.
On a side note, Donear Industries' current liabilities are still rather high at 71% 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. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.
In Conclusion...
All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. In spite of that, the stock has delivered a 31% return to shareholders who held over the last five years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.
If you'd like to know more about Donear Industries, we've spotted 5 warning signs, and 2 of them are a bit concerning.
While Donear Industries 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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About NSEI:DONEAR
Donear Industries
Primarily engages in manufacturing of fabrics under Donear brand name, and trading of garments under Dcot brand name in India and internationally.
Proven track record with mediocre balance sheet.
