Canadian Tire Corporation (TSE:CTC.A) Could Be Struggling To Allocate Capital

When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. 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. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. In light of that, from a first glance at Canadian Tire Corporation (TSE:CTC.A), we've spotted some signs that it could be struggling, so let's investigate.

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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 Canadian Tire Corporation, this is the formula:

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

0.083 = CA$1.3b ÷ (CA$22b - CA$6.3b) (Based on the trailing twelve months to December 2024).

Thus, Canadian Tire Corporation has an ROCE of 8.3%. Ultimately, that's a low return and it under-performs the Multiline Retail industry average of 13%.

See our latest analysis for Canadian Tire Corporation

Above you can see how the current ROCE for Canadian Tire Corporation compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Canadian Tire Corporation .

So How Is Canadian Tire Corporation's ROCE Trending?

We are a bit worried about the trend of returns on capital at Canadian Tire Corporation. Unfortunately the returns on capital have diminished from the 11% that they were earning five years ago. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Canadian Tire Corporation becoming one if things continue as they have.

The Key Takeaway

In summary, it's unfortunate that Canadian Tire Corporation is generating lower returns from the same amount of capital. Yet despite these poor fundamentals, the stock has gained a huge 122% over the last five years, so investors appear very optimistic. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

On a final note, we found 3 warning signs for Canadian Tire Corporation (1 shouldn't be ignored) you should be aware of.

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.

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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.