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Here's What's Concerning About Daktronics' (NASDAQ:DAKT) Returns On Capital

To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. So after we looked into Daktronics (NASDAQ:DAKT), the trends above didn't look too great.

What is 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. To calculate this metric for Daktronics, this is the formula:

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

0.016 = US$3.7m ÷ (US$415m - US$186m) (Based on the trailing twelve months to January 2022).

So, Daktronics has an ROCE of 1.6%. In absolute terms, that's a low return and it also under-performs the Electronic industry average of 11%.

View our latest analysis for Daktronics

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Historical performance is a great place to start when researching a stock so above you can see the gauge for Daktronics' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Daktronics, check out these free graphs here.

What The Trend Of ROCE Can Tell Us

There is reason to be cautious about Daktronics, given the returns are trending downwards. About five years ago, returns on capital were 4.6%, however they're now substantially lower than that as we saw above. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. If these trends continue, we wouldn't expect Daktronics to turn into a multi-bagger.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 45%, which has impacted the ROCE. Without this increase, it's likely that ROCE would be even lower than 1.6%. What this means is that in reality, a rather large portion of the business is being funded by the likes of the company's suppliers or short-term creditors, which can bring some risks of its own.

In Conclusion...

In summary, it's unfortunate that Daktronics is generating lower returns from the same amount of capital. Investors haven't taken kindly to these developments, since the stock has declined 62% from where it was five years ago. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

Daktronics does have some risks, we noticed 4 warning signs (and 1 which is a bit concerning) we think you should know about.

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

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.

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