Yahoo Finance Valvoline (NYSE:VVV) Will Be Looking To Turn Around Its Returns
If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. Having said that, after a brief look, Valvoline (NYSE:VVV) 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. Analysts use this formula to calculate it for Valvoline:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.18 = US$324m ÷ (US$2.8b - US$964m) (Based on the trailing twelve months to March 2024).
Therefore, Valvoline has an ROCE of 18%. On its own, that's a standard return, however it's much better than the 13% generated by the Specialty Retail industry.
View our latest analysis for Valvoline
Above you can see how the current ROCE for Valvoline compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Valvoline .
How Are Returns Trending?
In terms of Valvoline's historical ROCE movements, the trend doesn't inspire confidence. About five years ago, returns on capital were 25%, however they're now substantially lower than that as we saw above. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. If these trends continue, we wouldn't expect Valvoline to turn into a multi-bagger.
On a side note, Valvoline's current liabilities have increased over the last five years to 35% of total assets, effectively distorting the ROCE to some degree. Without this increase, it's likely that ROCE would be even lower than 18%. While the ratio isn't currently too high, it's worth keeping an eye on this because if it gets particularly high, the business could then face some new elements of risk.
Our Take On Valvoline's ROCE
In summary, it's unfortunate that Valvoline is generating lower returns from the same amount of capital. Yet despite these poor fundamentals, the stock has gained a huge 137% over the last five years, so investors appear very optimistic. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.
If you want to continue researching Valvoline, you might be interested to know about the 2 warning signs that our analysis has discovered.
While Valvoline 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.
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