Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? 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. Having said that, after a brief look, Pactiv Evergreen (NASDAQ:PTVE) we aren't filled with optimism, but let's investigate further.
Understanding 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 Pactiv Evergreen:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.049 = US$289m ÷ (US$6.8b - US$823m) (Based on the trailing twelve months to June 2021).
Therefore, Pactiv Evergreen has an ROCE of 4.9%. In absolute terms, that's a low return and it also under-performs the Packaging industry average of 10%.
In the above chart we have measured Pactiv Evergreen'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 Pactiv Evergreen.
What Can We Tell From Pactiv Evergreen's ROCE Trend?
The trend of ROCE at Pactiv Evergreen is showing some signs of weakness. Unfortunately, returns have declined substantially over the last five years to the 4.9% we see today. On top of that, the business is utilizing 60% less capital within its operations. When you see both ROCE and capital employed diminishing, it can often be a sign of a mature and shrinking business that might be in structural decline. Typically businesses that exhibit these characteristics aren't the ones that tend to multiply over the long term, because statistically speaking, they've already gone through the growth phase of their life cycle.
Our Take On Pactiv Evergreen's ROCE
In summary, it's unfortunate that Pactiv Evergreen is shrinking its capital base and also generating lower returns. Yet despite these concerning fundamentals, the stock has performed strongly with a 11% return over the last year, so investors appear very optimistic. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.
On a separate note, we've found 1 warning sign for Pactiv Evergreen you'll probably want to know about.
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 Pactiv Evergreen?
Price-To-Earnings ratio (6.1x) is below the US market (15x)
Earnings grew by 2053.3% over the past year
Earnings are forecast to decline by an average of 5.2% per year for the next 3 years
Interest payments are not well covered by earnings
Large one-off items impacting financial results
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.
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