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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. And from a first read, things don't look too good at Edgewell Personal Care (NYSE:EPC), so let's see why.
Understanding Return On Capital Employed (ROCE)
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. The formula for this calculation on Edgewell Personal Care is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.08 = US$254m ÷ (US$3.7b - US$564m) (Based on the trailing twelve months to September 2024).
So, Edgewell Personal Care has an ROCE of 8.0%. Ultimately, that's a low return and it under-performs the Personal Products industry average of 14%.
View our latest analysis for Edgewell Personal Care
Above you can see how the current ROCE for Edgewell Personal Care compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Edgewell Personal Care .
The Trend Of ROCE
We are a bit worried about the trend of returns on capital at Edgewell Personal Care. To be more specific, the ROCE was 11% five years ago, but since then it has dropped noticeably. Meanwhile, capital employed in the business has stayed roughly the flat over the period. 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. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Edgewell Personal Care becoming one if things continue as they have.
What We Can Learn From Edgewell Personal Care's ROCE
In summary, it's unfortunate that Edgewell Personal Care is generating lower returns from the same amount of capital. In spite of that, the stock has delivered a 27% return to shareholders who held over the last five years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.
Edgewell Personal Care does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those can't be ignored...