If you’re looking at a mature business that’s past the growth phase, what are some of the underlying trends that pop up? More often than not, we’ll see a declining return on capital employed (ROCE) and a declining 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. On that note, looking into Dana (NYSE:DAN), we weren’t too upbeat about how things were going.
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 Dana, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.064 = US$340m ÷ (US$7.9b – US$2.6b) (Based on the trailing twelve months to March 2024).
Therefore, Dana has an ROCE of 6.4%. Ultimately, that’s a low return and it under-performs the Auto Components industry average of 12%.
View our latest analysis for Dana
In the above chart we have measured Dana’s prior ROCE against its prior performance, but the future is arguably more important. If you’re interested, you can view the analysts predictions in our free analyst report for Dana .
The Trend Of ROCE
We are a bit worried about the trend of returns on capital at Dana. About five years ago, returns on capital were 12%, however they’re now substantially lower than that as we saw above. On top of that, it’s worth noting that the amount of capital employed within the business has remained relatively steady. 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. So because these trends aren’t typically conducive to creating a multi-bagger, we wouldn’t hold our breath on Dana becoming one if things continue as they have.
What We Can Learn From Dana’s ROCE
In summary, it’s unfortunate that Dana is generating lower returns from the same amount of capital. Long term shareholders who’ve owned the stock over the last five years have experienced a 13% depreciation in their investment, so it appears the market might not like these trends either. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.
If you want to know some of the risks facing Dana we’ve found 3 warning signs (1 is a bit concerning!) that you should be aware of before investing here.
While Dana 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.