Investors Could Be Concerned With Kohl's' (NYSE:KSS) Returns On Capital

What underlying fundamental trends can indicate that a company might be in decline? 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. Basically the company is earning less on its investments and it is also reducing its total assets. On that note, looking into Kohl's (NYSE:KSS), we weren't too upbeat about how things were going.

Return On Capital Employed (ROCE): What Is It?

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. To calculate this metric for Kohl's, this is the formula:

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

0.057 = US$606m ÷ (US$15b - US$4.4b) (Based on the trailing twelve months to November 2024).

Thus, Kohl's has an ROCE of 5.7%. In absolute terms, that's a low return and it also under-performs the Multiline Retail industry average of 12%.

Check out our latest analysis for Kohl's

Above you can see how the current ROCE for Kohl's 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 Kohl's .

What Can We Tell From Kohl's' ROCE Trend?

There is reason to be cautious about Kohl's, given the returns are trending downwards. To be more specific, the ROCE was 11% five years ago, but since then it has dropped noticeably. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. If these trends continue, we wouldn't expect Kohl's to turn into a multi-bagger.

In Conclusion...

In summary, it's unfortunate that Kohl's is generating lower returns from the same amount of capital. Investors haven't taken kindly to these developments, since the stock has declined 57% from where it was five years ago. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

Kohl's does have some risks, we noticed 2 warning signs (and 1 which is a bit concerning) we think you should 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.

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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.