What financial metrics can indicate to us that a company is maturing or even in decline? 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. Basically the company is earning less on its investments and it is also reducing its total assets. In light of that, from a first glance at Dover Motorsports (NYSE:DVD), we've spotted some signs that it could be struggling, so let's investigate.
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. Analysts use this formula to calculate it for Dover Motorsports:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.034 = US$2.7m ÷ (US$88m - US$5.9m) (Based on the trailing twelve months to December 2020).
Thus, Dover Motorsports has an ROCE of 3.4%. In absolute terms, that's a low return and it also under-performs the Hospitality industry average of 4.4%.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Dover Motorsports' ROCE against it's prior returns. If you'd like to look at how Dover Motorsports has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
How Are Returns Trending?
In terms of Dover Motorsports' historical ROCE movements, the trend doesn't inspire confidence. About five years ago, returns on capital were 11%, 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 Dover Motorsports to turn into a multi-bagger.
The Key Takeaway
In summary, it's unfortunate that Dover Motorsports is generating lower returns from the same amount of capital. Investors must expect better things on the horizon though because the stock has risen 6.1% 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.
One more thing, we've spotted 3 warning signs facing Dover Motorsports that you might find interesting.
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.
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