Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. 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, Dynamic Precision Industry (GTSM:8928) we aren't filled with optimism, but let's investigate further.
Understanding Return On Capital Employed (ROCE)
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Dynamic Precision Industry:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.16 = NT$148m ÷ (NT$2.2b - NT$1.2b) (Based on the trailing twelve months to September 2020).
Therefore, Dynamic Precision Industry has an ROCE of 16%. In absolute terms, that's a satisfactory return, but compared to the Leisure industry average of 12% it's much better.
See our latest analysis for Dynamic Precision Industry
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 want to delve into the historical earnings, revenue and cash flow of Dynamic Precision Industry, check out these free graphs here.
How Are Returns Trending?
We are a bit worried about the trend of returns on capital at Dynamic Precision Industry. About five years ago, returns on capital were 26%, however they're now substantially lower than that as we saw above. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. If these trends continue, we wouldn't expect Dynamic Precision Industry to turn into a multi-bagger.
While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 56%, which has impacted the ROCE. Without this increase, it's likely that ROCE would be even lower than 16%. What this means is that in reality, a rather large portion of the business is being funded by the likes of the company's suppliers or short-term creditors, which can bring some risks of its own.
In Conclusion...
All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. Investors must expect better things on the horizon though because the stock has risen 1.5% in 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.
Dynamic Precision Industry does come with some risks though, we found 4 warning signs in our investment analysis, and 2 of those are a bit concerning...
While Dynamic Precision Industry 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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About TPEX:8928
Dynamic Precision Industry
Manufactures and sells golf equipment worldwide.
Moderate second-rate dividend payer.
