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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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So when we looked at the ROCE trend of Academy Sports and Outdoors (NASDAQ:ASO) we really liked what we saw.
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. To calculate this metric for Academy Sports and Outdoors, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.26 = US$866m ÷ (US$4.7b - US$1.3b) (Based on the trailing twelve months to October 2021).
Therefore, Academy Sports and Outdoors has an ROCE of 26%. In absolute terms that's a great return and it's even better than the Specialty Retail industry average of 21%.
In the above chart we have measured Academy Sports and Outdoors' 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 Academy Sports and Outdoors here for free.
How Are Returns Trending?
Academy Sports and Outdoors has not disappointed with their ROCE growth. Looking at the data, we can see that even though capital employed in the business has remained relatively flat, the ROCE generated has risen by 401% over the last two years. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.
The Bottom Line
To sum it up, Academy Sports and Outdoors is collecting higher returns from the same amount of capital, and that's impressive. Since the stock has returned a staggering 167% to shareholders over the last year, it looks like investors are recognizing these changes. In light of that, we think it's worth looking further into this stock because if Academy Sports and Outdoors can keep these trends up, it could have a bright future ahead.
Academy Sports and Outdoors does have some risks though, and we've spotted 1 warning sign for Academy Sports and Outdoors that you might be interested in.
If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.
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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.