Returns On Capital Signal Difficult Times Ahead For Carnival Corporation & (NYSE:CCL)
What financial metrics can indicate to us that a company is maturing or even in decline? 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 reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. In light of that, from a first glance at Carnival Corporation & (NYSE:CCL), we've spotted some signs that it could be struggling, so let's investigate.
Return On Capital Employed (ROCE): What Is It?
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Carnival Corporation &:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.022 = US$861m ÷ (US$50b - US$11b) (Based on the trailing twelve months to August 2023).
So, Carnival Corporation & has an ROCE of 2.2%. Ultimately, that's a low return and it under-performs the Hospitality industry average of 9.6%.
View our latest analysis for Carnival Corporation &
In the above chart we have measured Carnival Corporation &'s 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 Carnival Corporation & here for free.
The Trend Of ROCE
We are a bit worried about the trend of returns on capital at Carnival Corporation &. About five years ago, returns on capital were 10%, however they're now substantially lower than that as we saw above. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Carnival Corporation & becoming one if things continue as they have.
The Bottom Line On Carnival Corporation &'s ROCE
In summary, it's unfortunate that Carnival Corporation & is generating lower returns from the same amount of capital. We expect this has contributed to the stock plummeting 76% during the last five years. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.
While Carnival Corporation & doesn't shine too bright in this respect, it's still worth seeing if the company is trading at attractive prices. You can find that out with our FREE intrinsic value estimation on our platform.
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.
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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.
