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There are a few key trends to look for if we want to identify the next multi-bagger. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Speaking of which, we noticed some great changes in Conn's' (NASDAQ:CONN) returns on capital, so let's have a look.
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. The formula for this calculation on Conn's is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.083 = US$122m ÷ (US$1.7b - US$218m) (Based on the trailing twelve months to April 2021).
Therefore, Conn's has an ROCE of 8.3%. In absolute terms, that's a low return and it also under-performs the Specialty Retail industry average of 15%.
Above you can see how the current ROCE for Conn's compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Conn's.
How Are Returns Trending?
Conn's has not disappointed in regards to ROCE growth. We found that the returns on capital employed over the last five years have risen by 710%. The company is now earning US$0.08 per dollar of capital employed. Interestingly, the business may be becoming more efficient because it's applying 20% less capital than it was five years ago. Conn's may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.
In the end, Conn's has proven it's capital allocation skills are good with those higher returns from less amount of capital. And a remarkable 255% total return over the last five years tells us that investors are expecting more good things to come in the future. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.
Conn's does have some risks, we noticed 4 warning signs (and 1 which is potentially serious) we think you should know about.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
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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