Yahoo Finance These Return Metrics Don't Make Dolby Laboratories (NYSE:DLB) Look Too Strong
What underlying fundamental trends can indicate that a company might be in decline? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. Basically the company is earning less on its investments and it is also reducing its total assets. So after glancing at the trends within Dolby Laboratories (NYSE:DLB), we weren't too hopeful.
Return On Capital Employed (ROCE): What Is It?
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. Analysts use this formula to calculate it for Dolby Laboratories:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.09 = US$217m ÷ (US$2.7b - US$278m) (Based on the trailing twelve months to September 2022).
Thus, Dolby Laboratories has an ROCE of 9.0%. In absolute terms, that's a low return but it's around the Software industry average of 10%.
Check out our latest analysis for Dolby Laboratories
Above you can see how the current ROCE for Dolby Laboratories 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 Dolby Laboratories here for free.
What Does the ROCE Trend For Dolby Laboratories Tell Us?
We are a bit worried about the trend of returns on capital at Dolby Laboratories. About five years ago, returns on capital were 11%, however they're now substantially lower than that as we saw above. 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. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Dolby Laboratories becoming one if things continue as they have.
What We Can Learn From Dolby Laboratories' ROCE
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. Despite the concerning underlying trends, the stock has actually gained 28% over the last five years, so it might be that the investors are expecting the trends to reverse. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.
If you want to continue researching Dolby Laboratories, you might be interested to know about the 1 warning sign that our analysis has discovered.
While Dolby Laboratories 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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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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