Be Wary Of MAV Beauty Brands (TSE:MAV) And Its Returns On Capital
If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Having said that, from a first glance at MAV Beauty Brands (TSE:MAV) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
Understanding 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 MAV Beauty Brands is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.041 = US$11m ÷ (US$298m - US$19m) (Based on the trailing twelve months to September 2021).
So, MAV Beauty Brands has an ROCE of 4.1%. In absolute terms, that's a low return and it also under-performs the Personal Products industry average of 14%.
View our latest analysis for MAV Beauty Brands
In the above chart we have measured MAV Beauty Brands' 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 MAV Beauty Brands Tell Us?
In terms of MAV Beauty Brands' historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 7.0% over the last four years. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.
What We Can Learn From MAV Beauty Brands' ROCE
From the above analysis, we find it rather worrisome that returns on capital and sales for MAV Beauty Brands have fallen, meanwhile the business is employing more capital than it was four years ago. Unsurprisingly then, the stock has dived 91% over the last three 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 want to continue researching MAV Beauty Brands, you might be interested to know about the 3 warning signs that our analysis has discovered.
While MAV Beauty Brands may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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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.
