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What financial metrics can indicate to us that a company is maturing or even in decline? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. Basically the company is earning less on its investments and it is also reducing its total assets. Having said that, after a brief look, Franklin Covey (NYSE:FC) we aren't filled with optimism, but let's investigate further.
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 Franklin Covey is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.046 = US$4.6m ÷ (US$196m - US$97m) (Based on the trailing twelve months to November 2020).
So, Franklin Covey has an ROCE of 4.6%. Ultimately, that's a low return and it under-performs the Professional Services industry average of 9.4%.
See our latest analysis for Franklin Covey
Above you can see how the current ROCE for Franklin Covey compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Franklin Covey here for free.
What Can We Tell From Franklin Covey's ROCE Trend?
The trend of ROCE at Franklin Covey is showing some signs of weakness. The company used to generate 12% on its capital five years ago but it has since fallen noticeably. On top of that, the business is utilizing 38% less capital within its operations. The combination of lower ROCE and less capital employed can indicate that a business is likely to be facing some competitive headwinds or seeing an erosion to its moat. 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 49%, which has impacted the ROCE. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. What this means is that in reality, a rather large portion of the business is being funded by the likes of the company's suppliers or short-term creditors, which can bring some risks of its own.
The Bottom Line
In short, lower returns and decreasing amounts capital employed in the business doesn't fill us with confidence. However the stock has delivered a 46% return to shareholders over the last five years, so investors might be expecting the trends to turn around. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.