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Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? 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. In light of that, from a first glance at DP Aircraft I (LON:DPA), we've spotted some signs that it could be struggling, so let's investigate.
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. To calculate this metric for DP Aircraft I, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.046 = US$6.5m ÷ (US$150m - US$9.2m) (Based on the trailing twelve months to June 2024).
So, DP Aircraft I has an ROCE of 4.6%. Ultimately, that's a low return and it under-performs the Trade Distributors industry average of 14%.
Check out our latest analysis for DP Aircraft I
Historical performance is a great place to start when researching a stock so above you can see the gauge for DP Aircraft I's ROCE against it's prior returns. If you'd like to look at how DP Aircraft I has performed in the past in other metrics, you can view this free graph of DP Aircraft I's past earnings, revenue and cash flow.
The Trend Of ROCE
In terms of DP Aircraft I's historical ROCE trend, it isn't fantastic. To be more specific, today's ROCE was 7.6% five years ago but has since fallen to 4.6%. In addition to that, DP Aircraft I is now employing 67% less capital than it was five years ago. The combination of lower ROCE and less capital employed can indicate that a business is likely to be facing some competitive headwinds or seeing an erosion to its moat. If these underlying trends continue, we wouldn't be too optimistic going forward.
The Bottom Line On DP Aircraft I's ROCE
In summary, it's unfortunate that DP Aircraft I is shrinking its capital base and also generating lower returns. This could explain why the stock has sunk a total of 92% in the last five years. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.
Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for DP Aircraft I (of which 1 shouldn't be ignored!) that you should know about.