What underlying fundamental trends can indicate that a company might be in decline? When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. In light of that, from a first glance at Signet Jewelers (NYSE:SIG), we've spotted some signs that it could be struggling, so let's investigate.
Return On Capital Employed (ROCE): What is it?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Signet Jewelers:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.11 = US$457m ÷ (US$6.2b - US$1.9b) (Based on the trailing twelve months to May 2021).
So, Signet Jewelers has an ROCE of 11%. In isolation, that's a pretty standard return but against the Specialty Retail industry average of 17%, it's not as good.
Above you can see how the current ROCE for Signet Jewelers 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 report for Signet Jewelers.
How Are Returns Trending?
We are a bit anxious about the trends of ROCE at Signet Jewelers. The company used to generate 15% on its capital five years ago but it has since fallen noticeably. In addition to that, Signet Jewelers is now employing 20% less capital than it was five years ago. The fact that both are shrinking is an indication that the business is going through some tough times. If these underlying trends continue, we wouldn't be too optimistic going forward.
While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 31%, which has impacted the ROCE. Without this increase, it's likely that ROCE would be even lower than 11%. While the ratio isn't currently too high, it's worth keeping an eye on this because if it gets particularly high, the business could then face some new elements of risk.
Our Take On Signet Jewelers' ROCE
In summary, it's unfortunate that Signet Jewelers is shrinking its capital base and also generating lower returns. Long term shareholders who've owned the stock over the last five years have experienced a 15% depreciation in their investment, so it appears the market might not like these trends either. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.
One final note, you should learn about the 2 warning signs we've spotted with Signet Jewelers (including 1 which is a bit concerning) .
While Signet Jewelers 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.
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