If you want to avoid a declining business, what trends can warn you about it? Declining businesses often have two underlying trends. return Capital Employed (ROCE) and Decreasing Trend base of capital employed. This combination shows that not only are companies reducing investment, but their returns on investment are also decreasing. If you look into that point, douglas dynamics (NYSE:PLOW), we weren't too optimistic about how things were going.
What is return on capital employed (ROCE)?
In case you're not familiar, ROCE is a metric that measures how much pre-tax profit (as a percentage) a company earns on the capital invested in its business. To calculate this metric for Douglas Dynamics, use the following formula:
Return on Capital Employed = Earnings before interest and tax (EBIT) ÷ (Total assets – Current liabilities)
0.095 = USD 45 million ÷ (USD 593 million – USD 119 million) (Based on the previous 12 months to December 2023).
therefore, Douglas Dynamics' ROCE is 9.5%. After all, this is a low rate of return, below the machinery industry average of 13%.
Check out our latest analysis for Douglas Dynamics.
Above you can see how Douglas Dynamics' current ROCE compares to its previous return on equity, but the past can only tell you so much. Want to see what analysts are predicting for the future? Check out Douglas Dynamics' free analyst report.
What does Douglas Dynamics' ROCE trend indicate?
The earnings trend that Douglas Dynamics is generating raises some concerns. The company was generating 12% of its capital five years ago, but has since declined significantly. Equally concerning is that the amount of capital pumped into the business fell by 20% over the same period. The fact that both are shrinking indicates that the business is going through tough times. If these fundamental trends continue, the outlook will be less optimistic.
Douglas Dynamics ROCE highlights
In summary, it's disappointing to see Douglas Dynamics shrink its capital base and see its profits decline. The market may not like this trend, either, as long-term shareholders who have held the stock over the past five years have seen their investments fall by 25%. If so, consider looking elsewhere unless the underlying trends return to a more positive trajectory.
However, Douglas Dynamics comes with some risks. 3 warning signs in our investment analysis, Two of them are a bit worrying…
If you want to find solid companies with high earnings, check this out. free List of companies with good balance sheets and good return on equity.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodologies, and articles are not intended to be financial advice. This is not a recommendation to buy or sell any stock, and does not take into account your objectives or financial situation. We aim to provide long-term, focused analysis based on fundamental data. Note that our analysis may not factor in the latest announcements or qualitative material from price-sensitive companies. Simply Wall St has no position in any stocks mentioned.
