What financial metrics can indicate to us that a company is maturing or even in decline? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. This indicates the company is producing less profit from its investments and its total assets are decreasing. And from a first read, things don't look too good at H&R Block (NYSE:HRB), so let's see why.
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. The formula for this calculation on H&R Block is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.28 = US$569m ÷ (US$2.6b - US$553m) (Based on the trailing twelve months to October 2020).
So, H&R Block has an ROCE of 28%. That's a fantastic return and not only that, it outpaces the average of 7.4% earned by companies in a similar industry.
In the above chart we have measured H&R Block'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 H&R Block.
What Can We Tell From H&R Block's ROCE Trend?
In terms of H&R Block's historical ROCE movements, the trend doesn't inspire confidence. To be more specific, the ROCE was 42% five years ago, but since then it has dropped noticeably. Meanwhile, capital employed in the business has stayed roughly the flat over the period. 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 H&R Block becoming one if things continue as they have.
The Bottom Line On H&R Block's ROCE
In summary, it's unfortunate that H&R Block is generating lower returns from the same amount of capital. Investors haven't taken kindly to these developments, since the stock has declined 42% from where it was five years ago. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.
One final note, you should learn about the 5 warning signs we've spotted with H&R Block (including 1 which is potentially serious) .
If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.
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