Some Investors May Be Worried About Revlon's (NYSE:REV) Returns On Capital
When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. On that note, looking into Revlon (NYSE:REV), 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. Analysts use this formula to calculate it for Revlon:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.07 = US$115m ÷ (US$2.4b - US$811m) (Based on the trailing twelve months to September 2021).
Therefore, Revlon has an ROCE of 7.0%. In absolute terms, that's a low return and it also under-performs the Personal Products industry average of 20%.
See our latest analysis for Revlon
In the above chart we have measured Revlon's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Revlon.
What The Trend Of ROCE Can Tell Us
In terms of Revlon's historical ROCE trend, it isn't fantastic. Unfortunately, returns have declined substantially over the last five years to the 7.0% we see today. On top of that, the business is utilizing 31% less capital within its operations. The combination of lower ROCE and less capital employed can indicate that a business is likely to be facing some competitive headwinds or seeing an erosion to its moat. If these underlying trends continue, we wouldn't be too optimistic going forward.
Our Take On Revlon's ROCE
To see Revlon reducing the capital employed in the business in tandem with diminishing returns, is concerning. It should come as no surprise then that the stock has fallen 70% over the last five years, so it looks like investors are recognizing these changes. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.
Revlon does have some risks, we noticed 3 warning signs (and 1 which is a bit concerning) we think you should know about.
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.
