Here's What To Make Of Macy's' (NYSE:M) Decelerating Rates Of Return

By
Simply Wall St
Published
January 21, 2022
NYSE:M
Source: Shutterstock

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after briefly looking over the numbers, we don't think Macy's (NYSE:M) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Macy's is:

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

0.14 = US$1.6b ÷ (US$18b - US$6.7b) (Based on the trailing twelve months to October 2021).

So, Macy's has an ROCE of 14%. By itself that's a normal return on capital and it's in line with the industry's average returns of 14%.

View our latest analysis for Macy's

roce
NYSE:M Return on Capital Employed January 21st 2022

In the above chart we have measured Macy's' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Macy's.

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

Things have been pretty stable at Macy's, with its capital employed and returns on that capital staying somewhat the same for the last five years. Businesses with these traits tend to be mature and steady operations because they're past the growth phase. With that in mind, unless investment picks up again in the future, we wouldn't expect Macy's to be a multi-bagger going forward.

The Key Takeaway

In a nutshell, Macy's has been trudging along with the same returns from the same amount of capital over the last five years. And with the stock having returned a mere 1.1% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 4 warning signs for Macy's (of which 1 is concerning!) that you should know about.

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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