When looking for a stock for investment, what can tell us that the company is in decline? A potentially declining business often exhibits two trends, one come back on capital employed (ROCE) which is down, and a base capital employed, which is also down. This indicates that the company is getting less profit from its investments and its total assets are decreasing. In light of this, at a first glance at lovely lingerie (NSE:LOVABLE), we’ve spotted signs that he might be in trouble, so let’s investigate.
Return on capital employed (ROCE): what is it?
Just to clarify if you’re not sure, ROCE is a measure of the pre-tax income (as a percentage) that a business earns on the capital invested in its business. To calculate this metric for Lovable Lingerie, here is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.011 = ₹20m ÷ (₹2.0b – ₹181m) (Based on the last twelve months to March 2022).
Therefore, Lovable Lingerie posted a ROCE of 1.1%. In absolute terms, this is a weak return and it is also below the luxury industry average of 13%.
Check out our latest review for Lovable Lingerie
Although the past is not indicative of the future, it can be useful to know the historical performance of a company, which is why we have this graph above. If you want to investigate more about Lovable Lingerie’s past, check out this free chart of past profits, revenue and cash flow.
What is the return trend?
We’re a little worried about ROCE trends at Lovable Lingerie. To be more specific, today’s ROCE was 6.8% five years ago, but has since fallen to 1.1%. On top of that, the company uses 20% less capital in its operations. When you see both ROCE and capital employed declining, it can often be a sign of a mature, declining business that may be in structural decline. If these underlying trends continue, we wouldn’t be too optimistic about the future.
To see Lovable Lingerie reduce the capital employed in the business at the same time as diminishing returns is concerning. Investors did not like these developments, as the stock fell 46% from five years ago. That being the case, unless the underlying trends return to a more positive trajectory, we would consider looking elsewhere.
Finally we found 3 warning signs for Lovable Lingerie (1 should not be ignored) which you should be aware of.
Although Lovable Lingerie isn’t currently generating the highest returns, we’ve compiled a list of companies that are currently generating over 25% return on equity. look at this free list here.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.