Slowing Rates Of Return At DMG MORI (ETR:GIL) Leave Little Room For Excitement
What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Having said that, from a first glance at DMG MORI (ETR:GIL) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
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. To calculate this metric for DMG MORI, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.13 = €193m ÷ (€2.8b - €1.3b) (Based on the trailing twelve months to December 2022).
Therefore, DMG MORI has an ROCE of 13%. In absolute terms, that's a satisfactory return, but compared to the Machinery industry average of 9.8% it's much better.
See our latest analysis for DMG MORI
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating DMG MORI's past further, check out this free graph of past earnings, revenue and cash flow.
What Does the ROCE Trend For DMG MORI Tell Us?
There hasn't been much to report for DMG MORI's returns and its level of capital employed because both metrics have been steady for the past five years. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. So unless we see a substantial change at DMG MORI in terms of ROCE and additional investments being made, we wouldn't hold our breath on it being 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 45%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.
What We Can Learn From DMG MORI's ROCE
In a nutshell, DMG MORI has been trudging along with the same returns from the same amount of capital over the last five years. Additionally, the stock's total return to shareholders over the last five years has been flat, which isn't too surprising. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.
DMG MORI does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those doesn't sit too well with us...
While DMG MORI isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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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.
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