When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. 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. And from a first read, things don't look too good at Petco Health and Wellness Company (NASDAQ:WOOF), so let's see why.

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What Is Return On Capital Employed (ROCE)?

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 Petco Health and Wellness Company:

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

0.0017 = US$7.1m ÷ (US$5.2b - US$1.1b) (Based on the trailing twelve months to February 2025).

Thus, Petco Health and Wellness Company has an ROCE of 0.2%. Ultimately, that's a low return and it under-performs the Specialty Retail industry average of 13%.

See our latest analysis for Petco Health and Wellness Company

Above you can see how the current ROCE for Petco Health and Wellness Company compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Petco Health and Wellness Company for free.

How Are Returns Trending?

The trend of ROCE doesn't look fantastic because it's fallen from 2.7% five years ago and the business is utilizing 24% less capital, even after their capital raise (conducted prior to the latest reporting period).

The Key Takeaway

In short, lower returns and decreasing amounts capital employed in the business doesn't fill us with confidence. This could explain why the stock has sunk a total of 84% in the last three years. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

Like most companies, Petco Health and Wellness Company does come with some risks, and we've found 1 warning sign that you should be aware of.

While Petco Health and Wellness Company 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.