Returns On Capital At Genesco (NYSE:GCO) Paint A Concerning Picture

If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. 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 Genesco (NYSE:GCO), 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. The formula for this calculation on Genesco is:

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

0.026 = US$29m ÷ (US$1.5b - US$397m) (Based on the trailing twelve months to February 2024).

So, Genesco has an ROCE of 2.6%. Ultimately, that's a low return and it under-performs the Specialty Retail industry average of 14%.

Check out our latest analysis for Genesco

In the above chart we have measured Genesco'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 Genesco .

The Trend Of ROCE

There is reason to be cautious about Genesco, given the returns are trending downwards. To be more specific, the ROCE was 7.8% five years ago, but since then it has dropped noticeably. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Genesco becoming one if things continue as they have.

What We Can Learn From Genesco's ROCE

In summary, it's unfortunate that Genesco is generating lower returns from the same amount of capital. It should come as no surprise then that the stock has fallen 37% 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.

If you're still interested in Genesco it's worth checking out our FREE intrinsic value approximation for GCO to see if it's trading at an attractive price in other respects.

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.