There are a few key trends to look for if we want to identify the next multi-bagger. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. That's why when we briefly looked at Big 5 Sporting Goods' (NASDAQ:BGFV) ROCE trend, we were pretty happy with what we saw.
Understanding Return On Capital Employed (ROCE)
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Big 5 Sporting Goods, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.12 = US$59m ÷ (US$735m - US$234m) (Based on the trailing twelve months to October 2022).
Therefore, Big 5 Sporting Goods has an ROCE of 12%. In absolute terms, that's a pretty standard return but compared to the Specialty Retail industry average it falls behind.
In the above chart we have measured Big 5 Sporting Goods' prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
What Can We Tell From Big 5 Sporting Goods' ROCE Trend?
The trend of ROCE doesn't stand out much, but returns on a whole are decent. Over the past five years, ROCE has remained relatively flat at around 12% and the business has deployed 79% more capital into its operations. Since 12% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.
Our Take On Big 5 Sporting Goods' ROCE
In the end, Big 5 Sporting Goods has proven its ability to adequately reinvest capital at good rates of return. And long term investors would be thrilled with the 121% return they've received over the last five years. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.
Big 5 Sporting Goods does have some risks, we noticed 4 warning signs (and 1 which can't be ignored) we think you should know about.
While Big 5 Sporting Goods 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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