Be Wary Of Kontoor Brands (NYSE:KTB) And Its Returns On Capital

Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? 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 combination can tell you that not only is the company investing less, it's earning less on what it does invest. In light of that, from a first glance at Kontoor Brands (NYSE:KTB), we've spotted some signs that it could be struggling, so let's investigate.

What is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Kontoor Brands is:

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

0.12 = US$144m ÷ (US$1.7b - US$463m) (Based on the trailing twelve months to September 2020).

Thus, Kontoor Brands has an ROCE of 12%. By itself that's a normal return on capital and it's in line with the industry's average returns of 12%.

View our latest analysis for Kontoor Brands

In the above chart we have measured Kontoor Brands' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Kontoor Brands.

What The Trend Of ROCE Can Tell Us

We are a bit anxious about the trends of ROCE at Kontoor Brands. Unfortunately, returns have declined substantially over the last two years to the 12% we see today. On top of that, the business is utilizing 31% less capital within its operations. When you see both ROCE and capital employed diminishing, it can often be a sign of a mature and shrinking business that might be in structural decline. If these underlying trends continue, we wouldn't be too optimistic going forward.

The Bottom Line

To see Kontoor Brands reducing the capital employed in the business in tandem with diminishing returns, is concerning. And long term shareholders have watched their investments stay flat over the last year. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

On a final note, we found 5 warning signs for Kontoor Brands (1 is a bit unpleasant) you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

This article by Simply Wall St is general in nature. 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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