Capital Allocation Trends At MAV Beauty Brands (TSE:MAV) Aren't Ideal
Did you know there are some financial metrics that can provide clues of a potential multi-bagger? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. 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 MAV Beauty Brands (TSE:MAV) and its ROCE trend, we weren't exactly thrilled.
What Is Return On Capital Employed (ROCE)?
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 MAV Beauty Brands:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.027 = US$7.3m ÷ (US$290m - US$21m) (Based on the trailing twelve months to June 2022).
Therefore, MAV Beauty Brands has an ROCE of 2.7%. Ultimately, that's a low return and it under-performs the Personal Products industry average of 19%.
View our latest analysis for MAV Beauty Brands
In the above chart we have measured MAV Beauty Brands' prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering MAV Beauty Brands here for free.
What Can We Tell From MAV Beauty Brands' ROCE Trend?
When we looked at the ROCE trend at MAV Beauty Brands, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 2.7% from 7.2% five years ago. 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.
The Bottom Line On MAV Beauty Brands' ROCE
From the above analysis, we find it rather worrisome that returns on capital and sales for MAV Beauty Brands have fallen, meanwhile the business is employing more capital than it was five years ago. Unsurprisingly then, the stock has dived 87% over the last three years, so investors are recognizing these changes and don't like the company's prospects. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.
Like most companies, MAV Beauty Brands does come with some risks, and we've found 3 warning signs that you should be aware of.
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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