In This Article:
If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. This indicates the company is producing less profit from its investments and its total assets are decreasing. On that note, looking into Designer Brands (NYSE:DBI), we weren't too upbeat about how things were going.
Understanding 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. Analysts use this formula to calculate it for Designer Brands:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.028 = US$40m ÷ (US$2.0b - US$590m) (Based on the trailing twelve months to February 2025).
Therefore, Designer Brands has an ROCE of 2.8%. Ultimately, that's a low return and it under-performs the Specialty Retail industry average of 13%.
See our latest analysis for Designer Brands
In the above chart we have measured Designer Brands' 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 Designer Brands for free.
What Can We Tell From Designer Brands' ROCE Trend?
The trend of ROCE at Designer Brands is showing some signs of weakness. To be more specific, today's ROCE was 7.8% five years ago but has since fallen to 2.8%. On top of that, the business is utilizing 21% less capital within its operations. The combination of lower ROCE and less capital employed can indicate that a business is likely to be facing some competitive headwinds or seeing an erosion to its moat. Typically businesses that exhibit these characteristics aren't the ones that tend to multiply over the long term, because statistically speaking, they've already gone through the growth phase of their life cycle.
The Bottom Line On Designer Brands' ROCE
To see Designer Brands reducing the capital employed in the business in tandem with diminishing returns, is concerning. Investors haven't taken kindly to these developments, since the stock has declined 43% from where it was five years ago. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.