Some Investors May Be Worried About Dialight's (LON:DIA) Returns On Capital
If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. So after we looked into Dialight (LON:DIA), the trends above didn't look too great.
What Is Return On Capital Employed (ROCE)?
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 Dialight is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.001 = UK£100k ÷ (UK£126m - UK£30m) (Based on the trailing twelve months to December 2023).
Thus, Dialight has an ROCE of 0.1%. In absolute terms, that's a low return and it also under-performs the Electrical industry average of 10%.
See our latest analysis for Dialight
In the above chart we have measured Dialight's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Dialight.
So How Is Dialight's ROCE Trending?
In terms of Dialight's historical ROCE movements, the trend doesn't inspire confidence. Unfortunately the returns on capital have diminished from the 8.8% 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. 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 Dialight to turn into a multi-bagger.
The Bottom Line
In summary, it's unfortunate that Dialight is generating lower returns from the same amount of capital. Investors haven't taken kindly to these developments, since the stock has declined 57% from where it was five years ago. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.
One more thing, we've spotted 2 warning signs facing Dialight that you might find interesting.
While Dialight 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.
