Is This A Sign of Things To Come At Wolverine World Wide (NYSE:WWW)?
What underlying fundamental trends can indicate that a company might be in decline? Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. Basically the company is earning less on its investments and it is also reducing its total assets. And from a first read, things don't look too good at Wolverine World Wide (NYSE:WWW), so let's see why.
What is 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. The formula for this calculation on Wolverine World Wide is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.045 = US$86m ÷ (US$2.6b - US$676m) (Based on the trailing twelve months to June 2020).
So, Wolverine World Wide has an ROCE of 4.5%. Ultimately, that's a low return and it under-performs the Luxury industry average of 10%.
See our latest analysis for Wolverine World Wide
In the above chart we have measured Wolverine World Wide'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 Wolverine World Wide.
What The Trend Of ROCE Can Tell Us
We are a bit worried about the trend of returns on capital at Wolverine World Wide. Unfortunately the returns on capital have diminished from the 12% that they were earning five years ago. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. If these trends continue, we wouldn't expect Wolverine World Wide to turn into a multi-bagger.
On a side note, Wolverine World Wide's current liabilities have increased over the last five years to 26% of total assets, effectively distorting the ROCE to some degree. Without this increase, it's likely that ROCE would be even lower than 4.5%. Keep an eye on this ratio, because the business could encounter some new risks if this metric gets too high.
Our Take On Wolverine World Wide's ROCE
In summary, it's unfortunate that Wolverine World Wide is generating lower returns from the same amount of capital. Investors must expect better things on the horizon though because the stock has risen 23% in the last five years. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.
Wolverine World Wide does have some risks, we noticed 2 warning signs (and 1 which shouldn't be ignored) 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.
This article by Simply Wall St is general in nature. 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.
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