Returns On Capital Signal Difficult Times Ahead For Genesco (NYSE:GCO)

Simply Wall St · 10/18 10:24

If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. 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 Genesco (NYSE:GCO), 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. To calculate this metric for Genesco, this is the formula:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.008 = US$7.9m ÷ (US$1.4b - US$396m) (Based on the trailing twelve months to August 2024).

Therefore, Genesco has an ROCE of 0.8%. Ultimately, that's a low return and it under-performs the Specialty Retail industry average of 12%.

Check out our latest analysis for Genesco

roce
NYSE:GCO Return on Capital Employed October 18th 2024

In the above chart we have measured Genesco'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 analyst report for Genesco .

What Does the ROCE Trend For Genesco Tell Us?

The trend of ROCE at Genesco is showing some signs of weakness. To be more specific, today's ROCE was 6.8% five years ago but has since fallen to 0.8%. On top of that, the business is utilizing 27% less capital within its operations. The fact that both are shrinking is an indication that the business is going through some tough times. Typically businesses that exhibit these characteristics aren't the ones that tend to multiply over the long term, because statistically speaking, they've already gone through the growth phase of their life cycle.

Our Take On Genesco's ROCE

To see Genesco reducing the capital employed in the business in tandem with diminishing returns, is concerning. Investors haven't taken kindly to these developments, since the stock has declined 26% from where it was five years ago. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

If you're still interested in Genesco it's worth checking out our FREE intrinsic value approximation for GCO to see if it's trading at an attractive price in other respects.

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.