Be Wary Of Skechers U.S.A (NYSE:SKX) And Its Returns On Capital

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. However, after investigating Skechers U.S.A (NYSE:SKX), we don't think it's current trends fit the mold of a multi-bagger.

Return On Capital Employed (ROCE): What is it?

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 Skechers U.S.A:

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

0.12 = US$616m ÷ (US$6.5b - US$1.4b) (Based on the trailing twelve months to March 2022).

So, Skechers U.S.A has an ROCE of 12%. That's a relatively normal return on capital, and it's around the 15% generated by the Luxury industry.

See our latest analysis for Skechers U.S.A

roce

In the above chart we have measured Skechers U.S.A'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 report for Skechers U.S.A.

How Are Returns Trending?

In terms of Skechers U.S.A's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 12% from 19% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

Our Take On Skechers U.S.A's ROCE

While returns have fallen for Skechers U.S.A in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And the stock has followed suit returning a meaningful 59% to shareholders over the last five years. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

If you'd like to know more about Skechers U.S.A, we've spotted 3 warning signs, and 1 of them is concerning.

While Skechers U.S.A 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.