Dow (NYSE:DOW) Could Be At Risk Of Shrinking As A Company
What underlying fundamental trends can indicate that a company might be in decline? When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. Having said that, after a brief look, Dow (NYSE:DOW) we aren't filled with optimism, but let's investigate further.
Understanding Return On Capital Employed (ROCE)
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Dow is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.051 = US$2.5b ÷ (US$59b - US$10b) (Based on the trailing twelve months to March 2024).
Therefore, Dow has an ROCE of 5.1%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 8.8%.
See our latest analysis for Dow
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.
The Trend Of ROCE
The trend of ROCE at Dow is showing some signs of weakness. Unfortunately, returns have declined substantially over the last five years to the 5.1% we see today. In addition to that, Dow is now employing 20% 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. Typically businesses that exhibit these characteristics aren't the ones that tend to multiply over the long term, because statistically speaking, they've already gone through the growth phase of their life cycle.
The Key Takeaway
In short, lower returns and decreasing amounts capital employed in the business doesn't fill us with confidence. But investors must be expecting an improvement of sorts because over the last five yearsthe stock has delivered a respectable 44% return. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.
On a final note, we found 4 warning signs for Dow (1 is concerning) you should be aware of.
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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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