What financial metrics can indicate to us that a company is maturing or even 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. Basically the company is earning less on its investments and it is also reducing its total assets. In light of that, from a first glance at Carter’s (NYSE:CRI), we’ve spotted some signs that it could be struggling, so let’s investigate.
What Is Return On Capital Employed (ROCE)?
For those who don’t know, ROCE is a measure of a company’s yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Carter’s, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.17 = US$306m ÷ (US$2.3b – US$518m) (Based on the trailing twelve months to July 2023).
Thus, Carter’s has an ROCE of 17%. In absolute terms, that’s a satisfactory return, but compared to the Luxury industry average of 13% it’s much better.
See our latest analysis for Carter’s
In the above chart we have measured Carter’s’ prior ROCE against its prior performance, but the future is arguably more important. If you’d like, you can check out the forecasts from the analysts covering Carter’s here for free.
So How Is Carter’s’ ROCE Trending?
In terms of Carter’s’ historical ROCE movements, the trend doesn’t inspire confidence. Unfortunately the returns on capital have diminished from the 23% 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. 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 Carter’s becoming one if things continue as they have.
The Bottom Line
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. Long term shareholders who’ve owned the stock over the last five years have experienced a 18% depreciation in their investment, so it appears the market might not like these trends either. That being the case, unless the underlying trends revert to a more positive trajectory, we’d consider looking elsewhere.
One more thing to note, we’ve identified 3 warning signs with Carter’s and understanding these should be part of your investment process.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
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Find out whether Carter’s 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.
