Darco Water Technologies (SGX:BLR) Could Be Struggling To Allocate Capital

When we're researching a company, it's sometimes hard to find the warning signs, but there are some financial metrics that can help spot trouble early. More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount 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. And from a first read, things don't look too good at Darco Water Technologies (SGX:BLR), so let's see why.

Return On Capital Employed (ROCE): What Is It?

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 Darco Water Technologies, this is the formula:

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

0.0014 = S$57k ÷ (S$87m - S$46m) (Based on the trailing twelve months to December 2022).

So, Darco Water Technologies has an ROCE of 0.1%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 5.8%.

See our latest analysis for Darco Water Technologies

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

SWOT Analysis for Darco Water Technologies

What Does the ROCE Trend For Darco Water Technologies Tell Us?

There is reason to be cautious about Darco Water Technologies, given the returns are trending downwards. Unfortunately the returns on capital have diminished from the 2.4% 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. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Darco Water Technologies becoming one if things continue as they have.

On a side note, Darco Water Technologies' current liabilities are still rather high at 53% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

Our Take On Darco Water Technologies' ROCE

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. Unsurprisingly then, the stock has dived 79% over the last five years, so investors are recognizing these changes and don't like the company's prospects. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

Like most companies, Darco Water Technologies does come with some risks, and we've found 2 warning signs that you should be aware of.

While Darco Water Technologies 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.