There are a few key trends to look for if we want to identify the next multi-bagger. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So on that note, Overstock.com (NASDAQ:OSTK) looks quite promising in regards to its trends of return on capital.
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. Analysts use this formula to calculate it for Overstock.com:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.096 = US$72m ÷ (US$1.0b - US$254m) (Based on the trailing twelve months to June 2022).
Therefore, Overstock.com has an ROCE of 9.6%. In absolute terms, that's a low return and it also under-performs the Online Retail industry average of 14%.
Above you can see how the current ROCE for Overstock.com 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 report for Overstock.com.
What Can We Tell From Overstock.com's ROCE Trend?
We're delighted to see that Overstock.com is reaping rewards from its investments and is now generating some pre-tax profits. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 9.6% on its capital. In addition to that, Overstock.com is employing 241% more capital than previously which is expected of a company that's trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.
On a related note, the company's ratio of current liabilities to total assets has decreased to 25%, which basically reduces it's funding from the likes of short-term creditors or suppliers. This tells us that Overstock.com has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.
Overall, Overstock.com gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 12% to shareholders. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.
If you want to know some of the risks facing Overstock.com we've found 4 warning signs (1 is a bit unpleasant!) that you should be aware of before investing here.
While Overstock.com may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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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