Kohl’s capital allocation trends suggest areas for improvement in their NYSE:KSS investment strategy.
When analyzing a company’s financial health, it’s essential to identify underlying fundamental trends that may indicate a business is in decline. One such trend is a declining Return on Capital Employed (ROCE), which suggests a mature business with falling returns and shrinking net assets.
Return On Capital Employed (ROCE): What Is It?
For those unfamiliar with ROCE, it’s a metric that measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate ROCE for Kohl’s (NYSE:KSS), we use the following formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) รท (Total Assets – Current Liabilities)
Using trailing twelve-month data to November 2024, we can see that Kohl’s has an ROCE of 5.7%, which is a low return compared to the Multiline Retail industry average of 12%.
Calculating Kohl’s ROCE
To calculate Kohl’s ROCE for the trailing twelve months ending November 2024, we use the following values:
- Earnings Before Interest and Tax (EBIT) = $606 million
- Total Assets = $15 billion
- Current Liabilities = $4.4 billion
Plugging these numbers into the formula above, we get an ROCE of 5.7%, which is lower than the industry average.
The Trend Of ROCE
While Kohl’s current ROCE is a concern, it’s essential to examine the trend over time. Five years ago, the company had an ROCE of 11%, but since then, it has dropped noticeably. Meanwhile, the business is utilizing roughly the same amount of capital as it was back then.
This downward trend in returns and stagnant capital employment can suggest that Kohl’s is a mature business with little growth over the last five years. If these trends continue, we wouldn’t expect the company to turn into a multi-bagger.
The Bottom Line
In conclusion, the lower returns from the same amount of capital employed are not exactly signs of a compounding machine. Long-term shareholders who’ve owned the stock over the last five years have experienced a 59% depreciation in their investment, which indicates that the market may not like these trends either.
With underlying trends that aren’t great in these areas, we’d consider looking elsewhere for investments with more promising prospects.
Risks and Warning Signs
While Kohl’s isn’t earning the highest return, it’s essential to acknowledge some risks associated with the company. We noticed 2 warning signs (and 1 which makes us a bit uncomfortable) that investors should be aware of.
Alternatives: Companies With High Returns on Equity
If you’re interested in companies with high returns on equity and solid balance sheets, we recommend checking out our list of top picks:
These companies have demonstrated strong financial performance and are worth considering for investment.
Conclusion
In conclusion, when analyzing a company’s financial health, it’s essential to identify underlying fundamental trends that may indicate a business is in decline. Kohl’s (NYSE:KSS) has shown signs of aging, with a declining ROCE and stagnant capital employment. While the company has some risks associated with it, there are alternative investments available with more promising prospects.
Disclaimer
This article by Simply Wall St is general in nature and provides commentary based on historical data and analyst forecasts only using an unbiased methodology. Our articles are not intended to be financial advice and do not constitute a recommendation to buy or sell any stock. 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.
