Yahoo Finance Card Factory's (LON:CARD) Returns On Capital Tell Us There Is Reason To Feel Uneasy
What financial metrics can indicate to us that a company is maturing or even in decline? 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. This indicates the company is producing less profit from its investments and its total assets are decreasing. In light of that, from a first glance at Card Factory (LON:CARD), we've spotted some signs that it could be struggling, so let's investigate.
Understanding 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. Analysts use this formula to calculate it for Card Factory:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.061 = UK£29m ÷ (UK£589m - UK£105m) (Based on the trailing twelve months to July 2020).
Thus, Card Factory has an ROCE of 6.1%. In absolute terms, that's a low return and it also under-performs the Specialty Retail industry average of 12%.
Check out our latest analysis for Card Factory
In the above chart we have measured Card Factory's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Card Factory.
What Does the ROCE Trend For Card Factory Tell Us?
We are a bit worried about the trend of returns on capital at Card Factory. Unfortunately the returns on capital have diminished from the 20% 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. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Card Factory becoming one if things continue as they have.
In Conclusion...
In summary, it's unfortunate that Card Factory is generating lower returns from the same amount of capital. Unsurprisingly then, the stock has dived 71% over the last five years, so investors are recognizing these changes and don't like the company's prospects. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.
One more thing to note, we've identified 3 warning signs with Card Factory and understanding them should be part of your investment process.
While Card Factory may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
This article by Simply Wall St is general in nature. 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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