Returns On Capital Signal Tricky Times Ahead For Container Store Group (NYSE:TCS)
Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at Container Store Group (NYSE:TCS) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
What Is Return On Capital Employed (ROCE)?
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Container Store Group is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.02 = US$15m ÷ (US$961m - US$193m) (Based on the trailing twelve months to December 2023).
So, Container Store Group has an ROCE of 2.0%. In absolute terms, that's a low return and it also under-performs the Specialty Retail industry average of 14%.
View our latest analysis for Container Store Group
In the above chart we have measured Container Store Group's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Container Store Group for free.
What Can We Tell From Container Store Group's ROCE Trend?
On the surface, the trend of ROCE at Container Store Group doesn't inspire confidence. Around five years ago the returns on capital were 9.4%, but since then they've fallen to 2.0%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.
What We Can Learn From Container Store Group's ROCE
From the above analysis, we find it rather worrisome that returns on capital and sales for Container Store Group have fallen, meanwhile the business is employing more capital than it was five years ago. Unsurprisingly then, the stock has dived 87% over the last five years, so investors are recognizing these changes and don't like the company's prospects. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.
If you'd like to know more about Container Store Group, we've spotted 4 warning signs, and 2 of them can't be ignored.
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.
