Returns On Capital At PetMed Express (NASDAQ:PETS) Paint A Concerning Picture

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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 PetMed Express (NASDAQ:PETS) and its ROCE trend, we weren't exactly thrilled.

Return On Capital Employed (ROCE): What is it?

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 PetMed Express:

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

0.18 = US$26m ÷ (US$176m - US$33m) (Based on the trailing twelve months to March 2022).

So, PetMed Express has an ROCE of 18%. On its own, that's a standard return, however it's much better than the 12% generated by the Online Retail industry.

Check out our latest analysis for PetMed Express

In the above chart we have measured PetMed Express' prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering PetMed Express here for free.

What Can We Tell From PetMed Express' ROCE Trend?

When we looked at the ROCE trend at PetMed Express, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 18% from 40% five years ago. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

What We Can Learn From PetMed Express' ROCE

In summary, we're somewhat concerned by PetMed Express' diminishing returns on increasing amounts of capital. It should come as no surprise then that the stock has fallen 41% over the last five years, so it looks like investors are recognizing these changes. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

PetMed Express does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those shouldn't be ignored...

While PetMed Express 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.