When we're researching a company, it's sometimes hard to find the warning signs, but there are some financial metrics that can help spot trouble early. 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 to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. And from a first read, things don't look too good at Groupon (NASDAQ:GRPN), 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. To calculate this metric for Groupon, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.067 = US$19m ÷ (US$581m - US$297m) (Based on the trailing twelve months to March 2024).
So, Groupon has an ROCE of 6.7%. Ultimately, that's a low return and it under-performs the Multiline Retail industry average of 11%.
NasdaqGS:GRPN Return on Capital Employed May 12th 2024
In the above chart we have measured Groupon'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 analyst report for Groupon .
What Can We Tell From Groupon's ROCE Trend?
The trend of ROCE doesn't look fantastic because it's fallen from 12% five years ago and the business is utilizing 60% less capital, even after their capital raise (conducted prior to the latest reporting period).
On a side note, Groupon's current liabilities are still rather high at 51% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.
What We Can Learn From Groupon's ROCE
In summary, it's unfortunate that Groupon is shrinking its capital base and also generating lower returns. We expect this has contributed to the stock plummeting 81% during the last five years. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.
Groupon does have some risks though, and we've spotted 3 warning signs for Groupon that you might be interested in.
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.