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Returns On Capital Tell Us A Lot About Dixons Carphone (LON:DC.)

Simply Wall St
·3-min read

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To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. 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. So after glancing at the trends within Dixons Carphone (LON:DC.), we weren't too hopeful.

Return On Capital Employed (ROCE): What is it?

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 Dixons Carphone:

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

0.027 = UK£127m ÷ (UK£7.7b - UK£3.1b) (Based on the trailing twelve months to May 2020).

Therefore, Dixons Carphone has an ROCE of 2.7%. In absolute terms, that's a low return and it also under-performs the Specialty Retail industry average of 9.1%.

View our latest analysis for Dixons Carphone

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In the above chart we have a measured Dixons Carphone's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Dixons Carphone.

How Are Returns Trending?

We are a bit worried about the trend of returns on capital at Dixons Carphone. Unfortunately the returns on capital have diminished from the 7.6% that they were earning five years ago. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. If these trends continue, we wouldn't expect Dixons Carphone to turn into a multi-bagger.

On a separate but related note, it's important to know that Dixons Carphone has a current liabilities to total assets ratio of 40%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

Our Take On Dixons Carphone's ROCE

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. This could explain why the stock has sunk a total of 78% in the last five years. Unless these trends revert to a more positive trajectory, we would look elsewhere.

While Dixons Carphone doesn't shine too bright in this respect, it's still worth seeing if the company is trading at attractive prices. You can find that out with our FREE intrinsic value estimation on our platform.

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

This article by Simply Wall St is general in nature. 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.

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