Yahoo Finance Driver Group (LON:DRV) Is Finding It Tricky To Allocate Its Capital
If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. This indicates the company is producing less profit from its investments and its total assets are decreasing. In light of that, from a first glance at Driver Group (LON:DRV), we've spotted some signs that it could be struggling, so let's investigate.
What Is 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 Driver Group, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.026 = UK£428k ÷ (UK£25m - UK£8.6m) (Based on the trailing twelve months to September 2023).
Thus, Driver Group has an ROCE of 2.6%. In absolute terms, that's a low return and it also under-performs the Construction industry average of 12%.
View our latest analysis for Driver Group
Above you can see how the current ROCE for Driver Group compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Driver Group here for free.
What Does the ROCE Trend For Driver Group Tell Us?
In terms of Driver Group's historical ROCE trend, it isn't fantastic. To be more specific, today's ROCE was 13% five years ago but has since fallen to 2.6%. On top of that, the business is utilizing 24% less capital within its operations. 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.
Our Take On Driver Group's ROCE
In summary, it's unfortunate that Driver Group is shrinking its capital base and also generating lower returns. Investors haven't taken kindly to these developments, since the stock has declined 55% from where it was five years ago. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.
Driver Group does have some risks, we noticed 3 warning signs (and 1 which is concerning) we think you should know about.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
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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.
