Ducommun's (NYSE:DCO) Returns On Capital Not Reflecting Well On The Business
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. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after briefly looking over the numbers, we don't think Ducommun (NYSE:DCO) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
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. The formula for this calculation on Ducommun is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.049 = US$47m ÷ (US$1.1b - US$167m) (Based on the trailing twelve months to July 2023).
So, Ducommun has an ROCE of 4.9%. Ultimately, that's a low return and it under-performs the Aerospace & Defense industry average of 9.6%.
Check out our latest analysis for Ducommun
In the above chart we have measured Ducommun's 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 Ducommun's ROCE Trending?
When we looked at the ROCE trend at Ducommun, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 4.9% from 6.2% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.
In Conclusion...
In summary, despite lower returns in the short term, we're encouraged to see that Ducommun is reinvesting for growth and has higher sales as a result. These trends are starting to be recognized by investors since the stock has delivered a 16% gain to shareholders who've held over the last five years. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.
On a final note, we found 4 warning signs for Ducommun (1 makes us a bit uncomfortable) you should be aware of.
While Ducommun may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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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.
