Oil-Dri Corporation of America (NYSE:ODC) Could Be Struggling To Allocate Capital
When researching a stock for investment, what can tell us that the company is in decline? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. Having said that, after a brief look, Oil-Dri Corporation of America (NYSE:ODC) we aren't filled with optimism, but let's investigate further.
What is Return On Capital Employed (ROCE)?
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Oil-Dri Corporation of America:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.05 = US$9.8m ÷ (US$228m - US$35m) (Based on the trailing twelve months to January 2021).
So, Oil-Dri Corporation of America has an ROCE of 5.0%. In absolute terms, that's a low return and it also under-performs the Household Products industry average of 22%.
See our latest analysis for Oil-Dri Corporation of America
Historical performance is a great place to start when researching a stock so above you can see the gauge for Oil-Dri Corporation of America's ROCE against it's prior returns. If you'd like to look at how Oil-Dri Corporation of America has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
How Are Returns Trending?
In terms of Oil-Dri Corporation of America's historical ROCE movements, the trend doesn't inspire confidence. About five years ago, returns on capital were 13%, 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 Oil-Dri Corporation of America to turn into a multi-bagger.
The Key Takeaway
In summary, it's unfortunate that Oil-Dri Corporation of America is generating lower returns from the same amount of capital. Despite the concerning underlying trends, the stock has actually gained 18% over the last five years, so it might be that the investors are expecting the trends to reverse. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.
On a separate note, we've found 1 warning sign for Oil-Dri Corporation of America you'll probably want to know about.
While Oil-Dri Corporation of America 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.
This article by Simply Wall St is general in nature. 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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