If we are looking to avoid a declining business, what are some trends that can alert us ahead of time? Declining businesses often have two underlying trends, on the one hand, a decline to recover on capital employed (ROCE) and a decrease based capital employed. This tells us that the company is not only reducing the size of its net assets, but that its returns are also decreasing. In light of this, a first glance at Franklin covey (NYSE: FC) we’ve spotted signs that he may be in trouble, so let’s investigate.
Understanding Return on Capital Employed (ROCE)
If you’ve never worked with ROCE before, it measures the “return” (profit before tax) that a business generates on capital employed in its business. Analysts use this formula to calculate it for Franklin Covey:
Return on capital employed = Profit before interest and taxes (EBIT) ÷ (Total assets – Current liabilities)
0.092 = US $ 9.9 million ÷ (US $ 213 million – US $ 105 million) (Based on the last twelve months up to May 2021).
Thereby, Franklin Covey has a 9.2% ROCE. On its own, that’s a low number, but it’s around the 11% average generated by the professional services industry.
See our latest analysis for Franklin Covey
In the chart above, we measured Franklin Covey’s past ROCE against its past performance, but the future is arguably more important. If you’d like to see what analysts are forecasting for the future, you should check out our free report for Franklin Covey.
What the ROCE trend can tell us
In terms of the historical trend of Franklin Covey’s ROCE, that’s not great. The company generated 12% of its capital five years ago, but it has fallen significantly since. On top of that, the company uses 21% less capital in its operations. The combination of lower ROCE and less capital employed can indicate that a company is likely to face competitive headwinds or to see its moat eroded. Generally, the companies that exhibit these characteristics are not the ones that tend to multiply over the long term, because statistically speaking, they have already gone through the growth phase of their life cycle.
In this regard, we noticed that the ratio of current liabilities to total assets rose to 49%, which impacted ROCE. If current liabilities hadn’t grown as much as they did, the ROCE might actually be even lower. And with current liabilities at these levels, suppliers or short-term creditors are effectively funding a large portion of the business, which can introduce some risk.
Our opinion on Franklin Covey’s ROCE
In short, lower returns and diminishing amounts of capital employed in the business do not give us confidence. The market must be optimistic about the future of the stock because while the underlying trends are not very encouraging, the stock has climbed 158%. Regardless, we don’t feel very comfortable with the fundamentals so we’re avoiding this title for now.
On a final note, we found 4 warning signs for Franklin Covey (1 cannot be ignored) you must be aware.
While Franklin Covey does not currently generate the highest returns, we have compiled a list of companies that currently generate over 25% return on equity. Check it out free list here.
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