Yahoo Finance dormakaba Holding (VTX:DOKA) Could Be At Risk Of Shrinking As A Company
If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. On that note, looking into dormakaba Holding (VTX:DOKA), we weren't too upbeat about how things were going.
Understanding Return On Capital Employed (ROCE)
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for dormakaba Holding, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.15 = CHF175m ÷ (CHF1.9b - CHF692m) (Based on the trailing twelve months to December 2023).
Therefore, dormakaba Holding has an ROCE of 15%. In isolation, that's a pretty standard return but against the Building industry average of 19%, it's not as good.
View our latest analysis for dormakaba Holding
Above you can see how the current ROCE for dormakaba Holding 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 dormakaba Holding .
What The Trend Of ROCE Can Tell Us
There is reason to be cautious about dormakaba Holding, given the returns are trending downwards. Unfortunately the returns on capital have diminished from the 32% that they were earning five years ago. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on dormakaba Holding becoming one if things continue as they have.
The Key Takeaway
All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. It should come as no surprise then that the stock has fallen 26% over the last five years, so it looks like investors are recognizing these changes. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.
dormakaba Holding does have some risks though, and we've spotted 2 warning signs for dormakaba Holding that you might be interested in.
While dormakaba Holding 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.
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