Investors Could Be Concerned With DMG MORI's (ETR:GIL) Returns On Capital
When we're researching a company, it's sometimes hard to find the warning signs, but there are some financial metrics that can help spot trouble early. 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 reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. And from a first read, things don't look too good at DMG MORI (ETR:GIL), so let's see why.
Return On Capital Employed (ROCE): What Is It?
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on DMG MORI is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.11 = €173m ÷ (€2.8b - €1.2b) (Based on the trailing twelve months to September 2023).
Therefore, DMG MORI has an ROCE of 11%. That's a pretty standard return and it's in line with the industry average of 11%.
Check out our latest analysis for DMG MORI
Historical performance is a great place to start when researching a stock so above you can see the gauge for DMG MORI's ROCE against it's prior returns. If you're interested in investigating DMG MORI's past further, check out this free graph covering DMG MORI's past earnings, revenue and cash flow.
The Trend Of ROCE
There is reason to be cautious about DMG MORI, given the returns are trending downwards. Unfortunately the returns on capital have diminished from the 16% that they were earning five years ago. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. 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 DMG MORI to turn into a multi-bagger.
On a separate but related note, it's important to know that DMG MORI has a current liabilities to total assets ratio of 43%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.
The Key Takeaway
All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. Investors must expect better things on the horizon though because the stock has risen 16% in the last five years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.
On a final note, we found 2 warning signs for DMG MORI (1 shouldn't be ignored) you should be aware of.
While DMG MORI 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.
