Stock Analysis

Danieli & C Officine Meccaniche SpA (BIT:DAN): The Return Story

BIT:DAN
Source: Shutterstock

The content of this article will benefit those of you who are starting to educate yourself about investing in the stock market and want to better understand how you can grow your money by investing in Danieli & C Officine Meccaniche SpA (BIT:DAN).

Danieli & C. Officine Meccaniche stock represents an ownership share in the company. As a result, your investment is being put to work to fund operations and if you want to earn an attractive return on your investment, the business needs to be making an adequate amount of money from the funds you provide. This is because the actual cash flow generated by the business dictates the potential for income (dividends) and capital appreciation (price increases), which are the two ways to achieve positive returns when buying a stock. To understand Danieli & C. Officine Meccaniche’s capital returns we will look at a useful metric called return on capital employed. This will tell us if the company is growing your capital and placing you in good stead to sell your shares at a profit.

View our latest analysis for Danieli & C. Officine Meccaniche

Advertisement

What is Return on Capital Employed (ROCE)?

You only have a finite amount of capital to invest, so there are only so many companies that you can add to your portfolio. Therefore all else aside, your investment in a certain company represents a vote of confidence that the money used to buy the stock will grow larger than if invested elsewhere. So the business' ability to grow the size of your capital is very important and can be assessed by comparing the return on capital you can get on your investment with a hurdle rate that depends on the other return possibilities you can identify. We'll look at Danieli & C. Officine Meccaniche’s returns by computing return on capital employed, which will tell us what the company can generate from the money spent in operations. I have calculated Danieli & C. Officine Meccaniche’s ROCE for you below:

ROCE Calculation for DAN

Return on Capital Employed (ROCE) = Earnings Before Tax (EBT) ÷ (Capital Employed)

Capital Employed = (Total Assets - Current Liabilities)

∴ ROCE = €81.50m ÷ (€4.72b - €2.54b) = 3.74%

As you can see, DAN earned €3.7 from every €100 you invested over the previous twelve months. This makes Danieli & C. Officine Meccaniche disappointing when compared to a robust 15% ROCE yardstick. So if this rate continues in to the future, investor capital may be able to compound over time, but not to standard that investors should be aiming for.

BIT:DAN Last Perf August 20th 18
BIT:DAN Last Perf August 20th 18

Then why have investors invested?

DAN doesn't return an attractive amount on capital, but this will only continue if the company is unable to increase earnings or decrease current capital requirements. So it is important for investors to understand what is going on under the hood and look at how these variables have been behaving. If you go back three years, you'll find that DAN’s ROCE has decreased from 11.68%. In this time, earnings have fallen from €250.79m to €81.50m and capital employed has increased due to a smaller reliance on current liabilities (less borrowed money) , which means the company's ROCE has shrunk as a result of falling earnings and simultaneous increases in capital requirements.

Next Steps

DAN's investors have experienced a downward trend in ROCE and it is currently at a level that makes us question whether the company is capable of providing a suitable return on investment. But don't forget, return on capital employed is a static metric that should be looked at in conjunction with other fundamental indicators like future prospects and valuation. If you're interested in diving deeper, take a look at what I've linked below for further information on these fundamentals and other potential investment opportunities.

  1. Future Outlook: What are well-informed industry analysts predicting for DAN’s future growth? Take a look at our free research report of analyst consensus for DAN’s outlook.
  2. Valuation: What is DAN worth today? Despite the unattractive ROCE, is the outlook correctly factored in to the price? The intrinsic value infographic in our free research report helps visualize whether DAN is currently undervalued by the market.
  3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.

Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article 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.

About BIT:DAN

Danieli & C. Officine Meccaniche

Designs, builds, and sells plants for the iron and steel industry in Europe, Russia, the Middle East, the Americas, and South East Asia.

Very undervalued with excellent balance sheet.

Advertisement