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. A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. On that note, looking into Capri Holdings (NYSE:CPRI), we weren't too upbeat about how things were going.

What Is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Capri Holdings:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.061 = US$302m ÷ (US$6.6b - US$1.7b) (Based on the trailing twelve months to June 2024).

Therefore, Capri Holdings has an ROCE of 6.1%. Ultimately, that's a low return and it under-performs the Luxury industry average of 13%.

Above you can see how the current ROCE for Capri Holdings compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Capri Holdings .

What Does the ROCE Trend For Capri Holdings Tell Us?

In terms of Capri Holdings' historical ROCE trend, it isn't fantastic. To be more specific, today's ROCE was 12% five years ago but has since fallen to 6.1%. In addition to that, Capri Holdings is now employing 26% less capital than it was five years ago. The combination of lower ROCE and less capital employed can indicate that a business is likely to be facing some competitive headwinds or seeing an erosion to its moat. If these underlying trends continue, we wouldn't be too optimistic going forward.

The Bottom Line

In summary, it's unfortunate that Capri Holdings is shrinking its capital base and also generating lower returns. In spite of that, the stock has delivered a 19% return to shareholders who held over the last five years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

If you'd like to know about the risks facing Capri Holdings, we've discovered 1 warning sign that you should be aware of.

While Capri Holdings 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.