Returns On Capital At DENTSPLY SIRONA (NASDAQ:XRAY) Have Hit The Brakes
To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. In light of that, when we looked at DENTSPLY SIRONA (NASDAQ:XRAY) and its ROCE trend, we weren't exactly thrilled.
Understanding 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 DENTSPLY SIRONA, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.048 = US$290m ÷ (US$7.2b - US$1.2b) (Based on the trailing twelve months to September 2023).
Therefore, DENTSPLY SIRONA has an ROCE of 4.8%. In absolute terms, that's a low return and it also under-performs the Medical Equipment industry average of 9.3%.
See our latest analysis for DENTSPLY SIRONA
In the above chart we have measured DENTSPLY SIRONA'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 DENTSPLY SIRONA.
So How Is DENTSPLY SIRONA's ROCE Trending?
We're a bit concerned with the trends, because the business is applying 22% less capital than it was five years ago and returns on that capital have stayed flat. This indicates to us that assets are being sold and thus the business is likely shrinking, which you'll remember isn't the typical ingredients for an up-and-coming multi-bagger. In addition to that, since the ROCE doesn't scream "quality" at 4.8%, it's hard to get excited about these developments.
What We Can Learn From DENTSPLY SIRONA's ROCE
It's a shame to see that DENTSPLY SIRONA is effectively shrinking in terms of its capital base. And in the last five years, the stock has given away 12% so the market doesn't look too hopeful on these trends strengthening any time soon. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.
One more thing to note, we've identified 1 warning sign with DENTSPLY SIRONA and understanding this should be part of your investment process.
While DENTSPLY SIRONA 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.
