When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. Having said that, after a brief look, Hanesbrands (NYSE:HBI) we aren't filled with optimism, but let's investigate further.
Return On Capital Employed (ROCE): What Is It?
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 Hanesbrands is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.072 = US$306m ÷ (US$5.9b - US$1.7b) (Based on the trailing twelve months to September 2023).
So, Hanesbrands has an ROCE of 7.2%. In absolute terms, that's a low return and it also under-performs the Luxury industry average of 12%.
View our latest analysis for Hanesbrands
Above you can see how the current ROCE for Hanesbrands compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Hanesbrands here for free.
So How Is Hanesbrands' ROCE Trending?
The trend of returns that Hanesbrands is generating are raising some concerns. The company used to generate 17% on its capital five years ago but it has since fallen noticeably. On top of that, the business is utilizing 22% less capital within its operations. The fact that both are shrinking is an indication that the business is going through some tough times. 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 Hanesbrands' ROCE
In summary, it's unfortunate that Hanesbrands is shrinking its capital base and also generating lower returns. Long term shareholders who've owned the stock over the last five years have experienced a 58% depreciation in their investment, so it appears the market might not like these trends either. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.
Like most companies, Hanesbrands does come with some risks, and we've found 1 warning sign that you should be aware of.
While Hanesbrands isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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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.