Yahoo Finance Under The Bonnet, Abercrombie & Fitch's (NYSE:ANF) Returns Look Impressive
What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in Abercrombie & Fitch's (NYSE:ANF) returns on capital, so let's have a look.
Understanding 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. Analysts use this formula to calculate it for Abercrombie & Fitch:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.29 = US$584m ÷ (US$3.0b - US$920m) (Based on the trailing twelve months to May 2024).
Therefore, Abercrombie & Fitch has an ROCE of 29%. In absolute terms that's a great return and it's even better than the Specialty Retail industry average of 12%.
View our latest analysis for Abercrombie & Fitch
In the above chart we have measured Abercrombie & Fitch's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Abercrombie & Fitch .
How Are Returns Trending?
We're pretty happy with how the ROCE has been trending at Abercrombie & Fitch. The data shows that returns on capital have increased by 394% over the trailing five years. The company is now earning US$0.3 per dollar of capital employed. Interestingly, the business may be becoming more efficient because it's applying 24% less capital than it was five years ago. Abercrombie & Fitch may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.
On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Effectively this means that suppliers or short-term creditors are now funding 31% of the business, which is more than it was five years ago. It's worth keeping an eye on this because as the percentage of current liabilities to total assets increases, some aspects of risk also increase.
What We Can Learn From Abercrombie & Fitch's ROCE
From what we've seen above, Abercrombie & Fitch has managed to increase it's returns on capital all the while reducing it's capital base. And a remarkable 1,043% total return over the last five years tells us that investors are expecting more good things to come in the future. Therefore, we think it would be worth your time to check if these trends are going to continue.
On a separate note, we've found 2 warning signs for Abercrombie & Fitch you'll probably want to know about.
High returns are a key ingredient to strong performance, so check out our free list ofstocks 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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