Edgewell Personal Care (NYSE:EPC) Is Finding It Tricky To Allocate Its Capital

When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. 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 Edgewell Personal Care (NYSE:EPC), so let's see why.

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. To calculate this metric for Edgewell Personal Care, this is the formula:

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

0.083 = US$262m ÷ (US$3.7b - US$535m) (Based on the trailing twelve months to June 2024).

Thus, Edgewell Personal Care has an ROCE of 8.3%. Ultimately, that's a low return and it under-performs the Personal Products industry average of 16%.

See our latest analysis for Edgewell Personal Care

In the above chart we have measured Edgewell Personal Care's 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 analyst report for Edgewell Personal Care .

What Can We Tell From Edgewell Personal Care's ROCE Trend?

In terms of Edgewell Personal Care's historical ROCE movements, the trend doesn't inspire confidence. To be more specific, the ROCE was 12% five years ago, but since then it has dropped noticeably. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. If these trends continue, we wouldn't expect Edgewell Personal Care to turn into a multi-bagger.

Our Take On Edgewell Personal Care'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. Despite the concerning underlying trends, the stock has actually gained 19% over the last five years, so it might be that the investors are expecting the trends to reverse. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

Edgewell Personal Care does have some risks, we noticed 3 warning signs (and 1 which is significant) we think you should know about.

While Edgewell Personal Care isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.