Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? A business that’s potentially in decline often shows two trends, a return on capital employed (ROCE) that’s declining, and a base of capital employed that’s also declining. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. In light of that, from a first glance at Data I/O (NASDAQ:DAIO), we’ve spotted some signs that it could be struggling, so let’s investigate.
Understanding Return On Capital Employed (ROCE)
Just to clarify if you’re unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Data I/O is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.037 = US$781k ÷ (US$27m – US$6.4m) (Based on the trailing twelve months to March 2023).
Thus, Data I/O has an ROCE of 3.7%. In absolute terms, that’s a low return and it also under-performs the Electronic industry average of 13%.
View our latest analysis for Data I/O
Historical performance is a great place to start when researching a stock so above you can see the gauge for Data I/O’s ROCE against it’s prior returns. If you’re interested in investigating Data I/O’s past further, check out this free graph of past earnings, revenue and cash flow.
What Can We Tell From Data I/O’s ROCE Trend?
In terms of Data I/O’s historical ROCE movements, the trend doesn’t inspire confidence. To be more specific, the ROCE was 20% five years ago, but since then it has dropped noticeably. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Since returns are falling and the business has the same amount of assets employed, this can suggest it’s a mature business that hasn’t had much growth in the last five years. If these trends continue, we wouldn’t expect Data I/O to turn into a multi-bagger.
The Key Takeaway
In the end, the trend of lower returns on the same amount of capital isn’t typically an indication that we’re looking at a growth stock. Investors haven’t taken kindly to these developments, since the stock has declined 37% from where it was five years ago. With underlying trends that aren’t great in these areas, we’d consider looking elsewhere.
On a final note, we found 3 warning signs for Data I/O (1 can’t be ignored) you should be aware of.
While Data I/O isn’t earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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Find out whether Data I/O is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.
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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.
