Here's What's Concerning About Qurate Retail's (NASDAQ:QRTE.A) Returns On Capital

To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. This reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. So after we looked into Qurate Retail (NASDAQ:QRTE.A), the trends above didn't look too great.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Qurate Retail is:

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

0.04 = US$363m ÷ (US$11b - US$2.5b) (Based on the trailing twelve months to September 2023).

So, Qurate Retail has an ROCE of 4.0%. In absolute terms, that's a low return and it also under-performs the Multiline Retail industry average of 9.7%.

View our latest analysis for Qurate Retail

Above you can see how the current ROCE for Qurate Retail compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What The Trend Of ROCE Can Tell Us

The trend of returns that Qurate Retail is generating are raising some concerns. To be more specific, today's ROCE was 9.9% five years ago but has since fallen to 4.0%. In addition to that, Qurate Retail is now employing 35% less capital than it was five years ago. 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. If these underlying trends continue, we wouldn't be too optimistic going forward.

What We Can Learn From Qurate Retail's ROCE

To see Qurate Retail reducing the capital employed in the business in tandem with diminishing returns, is concerning. This could explain why the stock has sunk a total of 90% in the last five years. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

If you'd like to know more about Qurate Retail, we've spotted 4 warning signs, and 3 of them are potentially serious.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.