Returns On Capital Signal Difficult Times Ahead For Petco Health and Wellness Company (NASDAQ:WOOF)

To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. 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 reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. And from a first read, things don't look too good at Petco Health and Wellness Company (NASDAQ:WOOF), so let's see why.

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. To calculate this metric for Petco Health and Wellness Company, this is the formula:

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

0.0017 = US$7.1m ÷ (US$5.2b - US$1.1b) (Based on the trailing twelve months to February 2025).

Therefore, Petco Health and Wellness Company has an ROCE of 0.2%. Ultimately, that's a low return and it under-performs the Specialty Retail industry average of 13%.

View our latest analysis for Petco Health and Wellness Company

Above you can see how the current ROCE for Petco Health and Wellness Company 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 analyst report for Petco Health and Wellness Company .

What The Trend Of ROCE Can Tell Us

The trend of ROCE doesn't look fantastic because it's fallen from 2.7% five years ago and the business is utilizing 24% less capital, even after their capital raise (conducted prior to the latest reporting period).

In Conclusion...

In summary, it's unfortunate that Petco Health and Wellness Company is shrinking its capital base and also generating lower returns. We expect this has contributed to the stock plummeting 84% during the last three years. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

One more thing to note, we've identified 1 warning sign with Petco Health and Wellness Company and understanding this should be part of your investment process.

While Petco Health and Wellness Company 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.