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We Think DICK'S Sporting Goods (NYSE:DKS) Might Have The DNA Of A Multi-Bagger

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at the ROCE trend of DICK'S Sporting Goods (NYSE:DKS) we really liked what we saw.

What Is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on DICK'S Sporting Goods is:

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

0.22 = US$1.5b ÷ (US$9.1b - US$2.5b) (Based on the trailing twelve months to April 2023).

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Therefore, DICK'S Sporting Goods has an ROCE of 22%. In absolute terms that's a great return and it's even better than the Specialty Retail industry average of 14%.

Check out our latest analysis for DICK'S Sporting Goods

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In the above chart we have measured DICK'S Sporting Goods' prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering DICK'S Sporting Goods here for free.

What Can We Tell From DICK'S Sporting Goods' ROCE Trend?

We like the trends that we're seeing from DICK'S Sporting Goods. Over the last five years, returns on capital employed have risen substantially to 22%. Basically the business is earning more per dollar of capital invested and in addition to that, 120% more capital is being employed now too. So we're very much inspired by what we're seeing at DICK'S Sporting Goods thanks to its ability to profitably reinvest capital.

In Conclusion...

To sum it up, DICK'S Sporting Goods has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Since the stock has returned a staggering 295% to shareholders over the last five years, it looks like investors are recognizing these changes. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

On a final note, we found 3 warning signs for DICK'S Sporting Goods (1 is concerning) you should be aware of.

DICK'S Sporting Goods is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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