There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at the ROCE trend of Deckers Outdoor (NYSE:DECK) we really liked what we saw.
Understanding Return On Capital Employed (ROCE)
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 Deckers Outdoor is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.32 = US$667m ÷ (US$2.8b - US$736m) (Based on the trailing twelve months to June 2023).
Thus, Deckers Outdoor has an ROCE of 32%. That's a fantastic return and not only that, it outpaces the average of 13% earned by companies in a similar industry.
Above you can see how the current ROCE for Deckers Outdoor 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 Deckers Outdoor.
So How Is Deckers Outdoor's ROCE Trending?
The trends we've noticed at Deckers Outdoor are quite reassuring. Over the last five years, returns on capital employed have risen substantially to 32%. Basically the business is earning more per dollar of capital invested and in addition to that, 105% more capital is being employed now too. So we're very much inspired by what we're seeing at Deckers Outdoor thanks to its ability to profitably reinvest capital.
A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Deckers Outdoor has. Since the stock has returned a staggering 371% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it's worth looking further into this stock because if Deckers Outdoor can keep these trends up, it could have a bright future ahead.
While Deckers Outdoor looks impressive, no company is worth an infinite price. The intrinsic value infographic in our free research report helps visualize whether DECK is currently trading for a fair price.
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.