Capital Allocation Trends At DHI Group (NYSE:DHX) Aren't Ideal

If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? 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. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. So after we looked into DHI Group (NYSE:DHX), the trends above didn't look too great.

Understanding 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. The formula for this calculation on DHI Group is:

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

0.063 = US$10m ÷ (US$224m - US$66m) (Based on the trailing twelve months to June 2024).

Therefore, DHI Group has an ROCE of 6.3%. Even though it's in line with the industry average of 6.3%, it's still a low return by itself.

View our latest analysis for DHI Group

Above you can see how the current ROCE for DHI Group compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for DHI Group .

So How Is DHI Group's ROCE Trending?

There is reason to be cautious about DHI Group, given the returns are trending downwards. To be more specific, the ROCE was 8.1% five years ago, but since then it has dropped noticeably. Meanwhile, capital employed in the business has stayed roughly the flat over the period. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. If these trends continue, we wouldn't expect DHI Group to turn into a multi-bagger.

The Bottom Line On DHI Group's ROCE

In summary, it's unfortunate that DHI Group is generating lower returns from the same amount of capital. It should come as no surprise then that the stock has fallen 49% over the last five years, so it looks like investors are recognizing these changes. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

If you want to know some of the risks facing DHI Group we've found 3 warning signs (1 is concerning!) that you should be aware of before investing here.

While DHI Group isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.