When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. A business that’s potentially in decline often shows two trends, a return on capital employed (ROCE) that’s declining, and a base of capital employed that’s also declining. This reveals that the company isn’t compounding shareholder wealth because returns are falling and its net asset base is shrinking. So after we looked into Dana (NYSE:DAN), the trends above didn’t look too great.
If you haven’t worked with ROCE before, it measures the ‘return’ (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Dana is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.066 = US$338m ÷ (US$7.9b – US$2.7b) (Based on the trailing twelve months to September 2024).
So, Dana has an ROCE of 6.6%. In absolute terms, that’s a low return and it also under-performs the Auto Components industry average of 11%.
View our latest analysis for Dana
Above you can see how the current ROCE for Dana compares to its prior returns on capital, but there’s only so much you can tell from the past. If you’re interested, you can view the analysts predictions in our free analyst report for Dana .
There is reason to be cautious about Dana, given the returns are trending downwards. Unfortunately the returns on capital have diminished from the 12% that they were earning five years ago. Meanwhile, capital employed in the business has stayed roughly the flat over the period. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren’t as high due potentially to new competition or smaller margins. If these trends continue, we wouldn’t expect Dana to turn into a multi-bagger.
All in all, the lower returns from the same amount of capital employed aren’t exactly signs of a compounding machine. Investors haven’t taken kindly to these developments, since the stock has declined 29% from where it was five years ago. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.
If you want to continue researching Dana, you might be interested to know about the 2 warning signs that our analysis has discovered.
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.