To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. In light of that, from a first glance at DENTSPLY SIRONA (NASDAQ:XRAY), we've spotted some signs that it could be struggling, so let's investigate.
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. Analysts use this formula to calculate it for DENTSPLY SIRONA:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.044 = US$279m ÷ (US$7.7b - US$1.3b) (Based on the trailing twelve months to June 2023).
Therefore, DENTSPLY SIRONA has an ROCE of 4.4%. In absolute terms, that's a low return and it also under-performs the Medical Equipment industry average of 9.6%.
See our latest analysis for DENTSPLY SIRONA
NasdaqGS:XRAY Return on Capital Employed October 20th 2023
Above you can see how the current ROCE for DENTSPLY SIRONA 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 DENTSPLY SIRONA here for free.
How Are Returns Trending?
We are a bit worried about the trend of returns on capital at DENTSPLY SIRONA. To be more specific, the ROCE was 6.3% five years ago, but since then it has dropped noticeably. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. 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 DENTSPLY SIRONA to turn into a multi-bagger.
In Conclusion...
In summary, it's unfortunate that DENTSPLY SIRONA is generating lower returns from the same amount of capital. And long term shareholders have watched their investments stay flat over the last five years. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.
DENTSPLY SIRONA does have some risks though, and we've spotted 1 warning sign for DENTSPLY SIRONA that you might be interested in.
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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