Here's What's Concerning About Cricut's (NASDAQ:CRCT) Returns On Capital
What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So when we looked at Cricut (NASDAQ:CRCT), they do have a high ROCE, but we weren't exactly elated from how returns are trending.
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. The formula for this calculation on Cricut is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.22 = US$159m ÷ (US$966m - US$233m) (Based on the trailing twelve months to March 2022).
Thus, Cricut has an ROCE of 22%. In absolute terms that's a great return and it's even better than the Consumer Durables industry average of 16%.
View our latest analysis for Cricut
In the above chart we have measured Cricut's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
So How Is Cricut's ROCE Trending?
In terms of Cricut's historical ROCE movements, the trend isn't fantastic. While it's comforting that the ROCE is high, three years ago it was 40%. However it looks like Cricut might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.
On a side note, Cricut has done well to pay down its current liabilities to 24% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.
The Key Takeaway
To conclude, we've found that Cricut is reinvesting in the business, but returns have been falling. Moreover, since the stock has crumbled 77% over the last year, it appears investors are expecting the worst. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.
If you want to know some of the risks facing Cricut we've found 3 warning signs (1 is a bit unpleasant!) that you should be aware of before investing here.
If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.
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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.
