These Return Metrics Don't Make Dow (NYSE:DOW) Look Too Strong

When researching a stock for investment, what can tell us that the company is in decline? 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. Having said that, after a brief look, Dow (NYSE:DOW) we aren't filled with optimism, but let's investigate further.

What Is 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. Analysts use this formula to calculate it for Dow:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.055 = US$2.6b ÷ (US$58b - US$10.0b) (Based on the trailing twelve months to December 2023).

So, Dow has an ROCE of 5.5%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 9.7%.

See our latest analysis for Dow

roce

Above you can see how the current ROCE for Dow 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 Dow for free.

So How Is Dow's ROCE Trending?

The trend of ROCE at Dow is showing some signs of weakness. To be more specific, today's ROCE was 8.2% five years ago but has since fallen to 5.5%. In addition to that, Dow is now employing 30% less capital than it was five years ago. The fact that both are shrinking is an indication that the business is going through some tough times. If these underlying trends continue, we wouldn't be too optimistic going forward.

The Key Takeaway

In summary, it's unfortunate that Dow is shrinking its capital base and also generating lower returns. Investors must expect better things on the horizon though because the stock has risen 33% in the last five years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

Like most companies, Dow does come with some risks, and we've found 4 warning signs that you should be aware of.

While Dow isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.