Capital Allocation Trends At Citi Trends (NASDAQ:CTRN) Aren't Ideal
There are a few key trends to look for if we want to identify the next multi-bagger. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Citi Trends (NASDAQ:CTRN) and its ROCE trend, we weren't exactly thrilled.
Understanding Return On Capital Employed (ROCE)
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Citi Trends, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.069 = US$23m ÷ (US$502m - US$166m) (Based on the trailing twelve months to July 2022).
Therefore, Citi Trends has an ROCE of 6.9%. Ultimately, that's a low return and it under-performs the Specialty Retail industry average of 18%.
View our latest analysis for Citi Trends
Above you can see how the current ROCE for Citi Trends 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 Citi Trends here for free.
What Does the ROCE Trend For Citi Trends Tell Us?
When we looked at the ROCE trend at Citi Trends, we didn't gain much confidence. To be more specific, ROCE has fallen from 10% over the last five years. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.
What We Can Learn From Citi Trends' ROCE
We're a bit apprehensive about Citi Trends because despite more capital being deployed in the business, returns on that capital and sales have both fallen. And long term shareholders have watched their investments stay flat over the last five years. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.
One more thing to note, we've identified 2 warning signs with Citi Trends and understanding them should be part of your investment process.
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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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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