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Capital Allocation Trends At Party City Holdco (NYSE:PRTY) Aren't Ideal

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·3 min read
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  • PRTY

What underlying fundamental trends can indicate that a company might be in decline? A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. And from a first read, things don't look too good at Party City Holdco (NYSE:PRTY), so let's see why.

What is 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 Party City Holdco, this is the formula:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.023 = US$48m ÷ (US$2.7b - US$570m) (Based on the trailing twelve months to March 2021).

Therefore, Party City Holdco has an ROCE of 2.3%. In absolute terms, that's a low return and it also under-performs the Specialty Retail industry average of 15%.

View our latest analysis for Party City Holdco

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Above you can see how the current ROCE for Party City Holdco 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 report on analyst forecasts for the company.

What Does the ROCE Trend For Party City Holdco Tell Us?

The trend of ROCE at Party City Holdco is showing some signs of weakness. To be more specific, today's ROCE was 9.3% five years ago but has since fallen to 2.3%. What's equally concerning is that the amount of capital deployed in the business has shrunk by 26% over that same period. When you see both ROCE and capital employed diminishing, it can often be a sign of a mature and shrinking business that might be in structural decline. Typically businesses that exhibit these characteristics aren't the ones that tend to multiply over the long term, because statistically speaking, they've already gone through the growth phase of their life cycle.

The Bottom Line On Party City Holdco's ROCE

In summary, it's unfortunate that Party City Holdco is shrinking its capital base and also generating lower returns. Investors haven't taken kindly to these developments, since the stock has declined 21% from where it was five years ago. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

One more thing, we've spotted 3 warning signs facing Party City Holdco that you might find interesting.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

This article by Simply Wall St is general in nature. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.