CoreCivic (NYSE:CXW) Could Be At Risk Of Shrinking As A Company

When we're researching a company, it's sometimes hard to find the warning signs, but there are some financial metrics that can help spot trouble early. Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. This reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. On that note, looking into CoreCivic (NYSE:CXW), we weren't too upbeat about how things were going.

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. Analysts use this formula to calculate it for CoreCivic:

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

0.063 = US$176m ÷ (US$3.2b - US$451m) (Based on the trailing twelve months to December 2022).

So, CoreCivic has an ROCE of 6.3%. In absolute terms, that's a low return and it also under-performs the Commercial Services industry average of 9.3%.

Check out our latest analysis for CoreCivic

Above you can see how the current ROCE for CoreCivic compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering CoreCivic here for free.

How Are Returns Trending?

There is reason to be cautious about CoreCivic, given the returns are trending downwards. To be more specific, the ROCE was 8.8% five years ago, but since then it has dropped noticeably. 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 CoreCivic becoming one if things continue as they have.

The Bottom Line On CoreCivic's ROCE

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. Investors haven't taken kindly to these developments, since the stock has declined 33% from where it was five years ago. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

If you'd like to know more about CoreCivic, we've spotted 4 warning signs, and 2 of them are a bit concerning.

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.

What are the risks and opportunities for CoreCivic?

NYSE:CXW

CoreCivic

CoreCivic, Inc. owns and operates partnership correctional, detention, and residential reentry facilities in the United States.Show more

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Rewards

• Price-To-Earnings ratio (8.4x) is below the US market (13.9x)

• Became profitable this year

Risks

• Earnings are forecast to decline by an average of 13.7% per year for the next 3 years

• Interest payments are not well covered by earnings

• Significant insider selling over the past 3 months

• Large one-off items impacting financial results

View all Risks and Rewards

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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.