Investors Could Be Concerned With CoreCivic's (NYSE:CXW) Returns On Capital
What underlying fundamental trends can indicate that a company might be in decline? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. 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. On that note, looking into CoreCivic (NYSE:CXW), we weren't too upbeat about how things were going.
Understanding 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. The formula for this calculation on CoreCivic is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.06 = US$164m ÷ (US$3.0b - US$274m) (Based on the trailing twelve months to June 2023).
Therefore, CoreCivic has an ROCE of 6.0%. Ultimately, that's a low return and it under-performs the Commercial Services industry average of 8.5%.
Check out our latest analysis for CoreCivic
In the above chart we have measured CoreCivic'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.
What Does the ROCE Trend For CoreCivic Tell Us?
There is reason to be cautious about CoreCivic, given the returns are trending downwards. Unfortunately the returns on capital have diminished from the 8.3% that they were earning five years ago. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. If these trends continue, we wouldn't expect CoreCivic to turn into a multi-bagger.
Our Take On CoreCivic's ROCE
In summary, it's unfortunate that CoreCivic is generating lower returns from the same amount of capital. It should come as no surprise then that the stock has fallen 51% over the last five years, so it looks like investors are recognizing these changes. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.
One final note, you should learn about the 3 warning signs we've spotted with CoreCivic (including 2 which shouldn't be ignored) .
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.
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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.
