Here's What To Make Of Dolby Laboratories' (NYSE:DLB) Decelerating Rates Of Return

By
Simply Wall St
Published
October 24, 2021
NYSE:DLB
Source: Shutterstock

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, the ROCE of Dolby Laboratories (NYSE:DLB) looks decent, right now, so lets see what the trend of returns can tell us.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Dolby Laboratories is:

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

0.12 = US$331m ÷ (US$3.1b - US$309m) (Based on the trailing twelve months to June 2021).

So, Dolby Laboratories has an ROCE of 12%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Software industry average of 10%.

Check out our latest analysis for Dolby Laboratories

roce
NYSE:DLB Return on Capital Employed October 25th 2021

In the above chart we have measured Dolby Laboratories' prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

So How Is Dolby Laboratories' ROCE Trending?

While the current returns on capital are decent, they haven't changed much. The company has consistently earned 12% for the last five years, and the capital employed within the business has risen 38% in that time. 12% is a pretty standard return, and it provides some comfort knowing that Dolby Laboratories has consistently earned this amount. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.

What We Can Learn From Dolby Laboratories' ROCE

In the end, Dolby Laboratories has proven its ability to adequately reinvest capital at good rates of return. And long term investors would be thrilled with the 104% return they've received over the last five years. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.

On a separate note, we've found 1 warning sign for Dolby Laboratories you'll probably want to know about.

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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