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When it comes to investing, there are some useful financial indicators that can alert us when a business is potentially in trouble. Declining businesses often have two underlying trends, on the one hand, a decline to recover on capital employed (ROCE) and a decrease based capital employed. This indicates that the company is making less profit from its investments and that its total assets are decreasing. On that note, examining Macy’s (NYSE: M), we weren’t too optimistic about the way things were going.
Return on capital employed (ROCE): what is it?
Just to clarify if you’re not sure, ROCE is a measure of the pre-tax income (as a percentage) that a business earns on the capital invested in its business. The formula for this calculation on Macy’s is:
Return on capital employed = Profit before interest and taxes (EBIT) ÷ (Total assets – Current liabilities)
0.11 = US $ 1.3 billion ÷ (US $ 18 billion – US $ 6.7 billion) (Based on the last twelve months up to July 2021).
Therefore, Macy’s has a ROCE of 11%. That’s a relatively normal return on capital, and it’s around the 13% generated by the multi-line retail industry.
Check out our latest analysis for Macy’s
In the graph above, we’ve measured Macy’s past ROCE versus past performance, but arguably the future is more important. If you’d like to see what analysts are forecasting for the future, you should check out our free report for Macy’s.
The ROCE trend
In terms of Macy’s historic ROCE moves, the trend does not inspire confidence. To be more precise, the ROCE was 15% five years ago, but since then it has fallen noticeably. During this time, the capital employed in the company remained roughly stable over the period. As returns decline and the company has the same number of assets employed, this may suggest that it is a mature company that has not seen much growth in the past five years. So, because these trends are generally not conducive to building a multi-bagger, we won’t hold our breath that Macy’s becomes one if things continue the way they did.
The key to take away
Ultimately, the downward trend in returns on the same amount of capital is generally not an indication that we are considering a growth stock. So it’s no surprise that the stock has fallen 16% over the past five years, so it looks like investors are recognizing these changes. With underlying trends not being great in these areas, we would consider looking elsewhere.
Macy’s has risks, we noticed 5 warning signs (and 1 which is significant) we think you should be aware of.
While Macy’s doesn’t get the highest return, check out this free list of companies that generate high returns on equity with strong balance sheets.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.
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