De Licacy Industrial (TWSE:1464) May Have Issues Allocating Its Capital

What financial metrics can indicate to us that a company is maturing or even in decline? A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. This indicates the company is producing less profit from its investments and its total assets are decreasing. And from a first read, things don't look too good at De Licacy Industrial (TWSE:1464), so let's see why.

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. To calculate this metric for De Licacy Industrial, this is the formula:

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

0.018 = NT$167m ÷ (NT$15b - NT$5.7b) (Based on the trailing twelve months to June 2024).

So, De Licacy Industrial has an ROCE of 1.8%. On its own that's a low return on capital but it's in line with the industry's average returns of 2.1%.

Check out our latest analysis for De Licacy Industrial

Historical performance is a great place to start when researching a stock so above you can see the gauge for De Licacy Industrial's ROCE against it's prior returns. If you'd like to look at how De Licacy Industrial has performed in the past in other metrics, you can view this free graph of De Licacy Industrial's past earnings, revenue and cash flow.

So How Is De Licacy Industrial's ROCE Trending?

We are a bit worried about the trend of returns on capital at De Licacy Industrial. About five years ago, returns on capital were 4.3%, 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 five years. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on De Licacy Industrial becoming one if things continue as they have.

On a side note, De Licacy Industrial has done well to pay down its current liabilities to 38% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

In Conclusion...

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 30% over the last five years, 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.

De Licacy Industrial does have some risks though, and we've spotted 2 warning signs for De Licacy Industrial that you might be interested in.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.