There Are Reasons To Feel Uneasy About PetIQ's (NASDAQ:PETQ) Returns On Capital

There are a few key trends to look for if we want to identify the next multi-bagger. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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. In light of that, when we looked at PetIQ (NASDAQ:PETQ) and its ROCE trend, we weren't exactly thrilled.

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. Analysts use this formula to calculate it for PetIQ:

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

0.028 = US$20m ÷ (US$820m - US$98m) (Based on the trailing twelve months to December 2021).

So, PetIQ has an ROCE of 2.8%. In absolute terms, that's a low return and it also under-performs the Healthcare industry average of 11%.

View our latest analysis for PetIQ

Above you can see how the current ROCE for PetIQ compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for PetIQ.

The Trend Of ROCE

On the surface, the trend of ROCE at PetIQ doesn't inspire confidence. To be more specific, ROCE has fallen from 5.9% over the last five years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

The Key Takeaway

While returns have fallen for PetIQ in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. These growth trends haven't led to growth returns though, since the stock has fallen 21% over the last three years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

Like most companies, PetIQ does come with some risks, and we've found 1 warning sign that you should be aware of.

While PetIQ may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.