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What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Columbia Sportswear (NASDAQ:COLM), 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 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. Analysts use this formula to calculate it for Columbia Sportswear:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.074 = US$159m ÷ (US$2.7b - US$500m) (Based on the trailing twelve months to September 2020).
Thus, Columbia Sportswear has an ROCE of 7.4%. In absolute terms, that's a low return and it also under-performs the Luxury industry average of 13%.
In the above chart we have measured Columbia Sportswear's 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 Columbia Sportswear here for free.
What Can We Tell From Columbia Sportswear's ROCE Trend?
When we looked at the ROCE trend at Columbia Sportswear, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 7.4% from 17% five years ago. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.
From the above analysis, we find it rather worrisome that returns on capital and sales for Columbia Sportswear have fallen, meanwhile the business is employing more capital than it was five years ago. But investors must be expecting an improvement of sorts because over the last five yearsthe stock has delivered a respectable 86% return. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.
Columbia Sportswear does have some risks though, and we've spotted 1 warning sign for Columbia Sportswear that you might be interested in.
While Columbia Sportswear isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
This article by Simply Wall St is general in nature. 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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