U.S. markets open in 5 hours 57 minutes
  • S&P Futures

    4,302.50
    -5.25 (-0.12%)
     
  • Dow Futures

    34,094.00
    -24.00 (-0.07%)
     
  • Nasdaq Futures

    13,624.50
    -33.75 (-0.25%)
     
  • Russell 2000 Futures

    2,022.70
    -0.60 (-0.03%)
     
  • Crude Oil

    87.16
    +0.63 (+0.73%)
     
  • Gold

    1,789.40
    -0.30 (-0.02%)
     
  • Silver

    20.07
    -0.02 (-0.10%)
     
  • EUR/USD

    1.0163
    -0.0008 (-0.08%)
     
  • 10-Yr Bond

    2.8240
    0.0000 (0.00%)
     
  • Vix

    19.75
    -0.20 (-1.00%)
     
  • GBP/USD

    1.2091
    -0.0004 (-0.03%)
     
  • USD/JPY

    134.7850
    +0.5700 (+0.42%)
     
  • BTC-USD

    24,111.10
    +105.38 (+0.44%)
     
  • CMC Crypto 200

    576.87
    +4.96 (+0.87%)
     
  • FTSE 100

    7,540.57
    +4.51 (+0.06%)
     
  • Nikkei 225

    29,222.77
    +353.86 (+1.23%)
     

PetIQ (NASDAQ:PETQ) Might Be Having Difficulty Using Its Capital Effectively

  • Oops!
    Something went wrong.
    Please try again later.
·3 min read
In this article:
  • Oops!
    Something went wrong.
    Please try again later.

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think PetIQ (NASDAQ:PETQ) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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 PetIQ:

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

0.028 = US$21m ÷ (US$924m - US$173m) (Based on the trailing twelve months to March 2022).

Therefore, PetIQ has an ROCE of 2.8%. In absolute terms, that's a low return and it also under-performs the Healthcare industry average of 10%.

View our latest analysis for PetIQ

roce
roce

Above you can see how the current ROCE for PetIQ 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 Can We Tell From PetIQ's ROCE Trend?

When we looked at the ROCE trend at PetIQ, we didn't gain much confidence. To be more specific, ROCE has fallen from 6.4% over the last five years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

The Bottom Line

While returns have fallen for PetIQ in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. These growth trends haven't led to growth returns though, since the stock has fallen 48% over the last three years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for PetIQ (of which 1 is potentially serious!) that 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.

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

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.

Join A Paid User Research Session
You’ll receive a US$30 Amazon Gift card for 1 hour of your time while helping us build better investing tools for the individual investors like yourself. Sign up here