The Returns On Capital At MAV Beauty Brands (TSE:MAV) Don't Inspire Confidence

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after briefly looking over the numbers, we don't think MAV Beauty Brands (TSE:MAV) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on MAV Beauty Brands is:

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

0.027 = US$7.3m ÷ (US$290m - US$21m) (Based on the trailing twelve months to June 2022).

So, MAV Beauty Brands has an ROCE of 2.7%. In absolute terms, that's a low return and it also under-performs the Personal Products industry average of 17%.

Check out the opportunities and risks within the CA Personal Products industry.

In the above chart we have measured MAV Beauty Brands' prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

The Trend Of ROCE

In terms of MAV Beauty Brands' historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 7.2%, but since then they've fallen to 2.7%. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

The Bottom Line

In summary, we're somewhat concerned by MAV Beauty Brands' diminishing returns on increasing amounts of capital. This could explain why the stock has sunk a total of 92% in the last three years. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

One more thing to note, we've identified 3 warning signs with MAV Beauty Brands 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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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.