The Returns On Capital At Aaron's Company (NYSE:AAN) Don't Inspire Confidence
When researching a stock for investment, what can tell us that the company is in decline? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. Basically the company is earning less on its investments and it is also reducing its total assets. In light of that, from a first glance at Aaron's Company (NYSE:AAN), we've spotted some signs that it could be struggling, so let's investigate.
What Is Return On Capital Employed (ROCE)?
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Aaron's Company, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.09 = US$140m ÷ (US$1.8b - US$265m) (Based on the trailing twelve months to June 2023).
Therefore, Aaron's Company has an ROCE of 9.0%. In absolute terms, that's a low return and it also under-performs the Specialty Retail industry average of 13%.
View our latest analysis for Aaron's Company
Above you can see how the current ROCE for Aaron's Company compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Aaron's Company.
How Are Returns Trending?
In terms of Aaron's Company's historical ROCE movements, the trend doesn't inspire confidence. About four years ago, returns on capital were 12%, however they're now substantially lower than that as we saw above. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last four years. If these trends continue, we wouldn't expect Aaron's Company to turn into a multi-bagger.
What We Can Learn From Aaron's Company's ROCE
In summary, it's unfortunate that Aaron's Company is generating lower returns from the same amount of capital. And, the stock has remained flat over the last year, so investors don't seem too impressed either. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.
One more thing, we've spotted 1 warning sign facing Aaron's Company that you might find interesting.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.
