Benzinga | Aug 18, 2020 10:34AM EDT

Return On Capital Employed Overview: Wayfair

Wayfair (NYSE:W) posted a 214.47% decrease in earnings from Q1. Sales, however, increased by 84.76% over the previous quarter to $4.30 billion. Despite the increase in sales this quarter, the decrease in earnings may suggest Wayfair is not utilizing their capital as effectively as possible. Wayfair collected $2.33 billion in revenue during Q1, but reported earnings showed a $262.07 million loss.

What Is Return On Capital Employed?

Changes in earnings and sales indicate shifts in Wayfair's Return on Capital Employed, a measure of yearly pre-tax profit relative to capital employed in a business. Generally, a higher ROCE suggests successful growth in a company and is a sign of higher earnings per share for shareholders in the future. In Q2, Wayfair posted an ROCE of -0.38%.

It is important to keep in mind ROCE evaluates past performance and is not used as a predictive tool. It is a good measure of a company's recent performance, but several factors could affect earnings and sales in the near future.

Return on Capital Employed is an important measurement of efficiency and a useful tool when comparing companies that operate in the same industry. A relatively high ROCE indicates a company may be generating profits that can be reinvested into more capital, leading to higher returns and growing EPS for shareholders.

For Wayfair, the return on capital employed ratio shows the current amount of assets may not actually be helping the company achieve higher returns, a note many investors will take into account when making long-term financial decisions.

Q2 Earnings Insight

Wayfair reported Q2 earnings per share at $3.13/share, which beat analyst predictions of $0.95/share.