Advertisement
U.S. markets open in 1 hour 40 minutes
  • S&P Futures

    5,190.50
    -24.25 (-0.47%)
     
  • Dow Futures

    39,129.00
    -94.00 (-0.24%)
     
  • Nasdaq Futures

    18,110.00
    -121.50 (-0.67%)
     
  • Russell 2000 Futures

    2,040.20
    -9.60 (-0.47%)
     
  • Crude Oil

    82.79
    +0.07 (+0.08%)
     
  • Gold

    2,158.00
    -6.30 (-0.29%)
     
  • Silver

    25.15
    -0.12 (-0.47%)
     
  • EUR/USD

    1.0854
    -0.0022 (-0.21%)
     
  • 10-Yr Bond

    4.3400
    0.0000 (0.00%)
     
  • Vix

    14.84
    +0.51 (+3.56%)
     
  • GBP/USD

    1.2693
    -0.0036 (-0.28%)
     
  • USD/JPY

    150.4180
    +1.3200 (+0.89%)
     
  • Bitcoin USD

    63,100.79
    -5,129.61 (-7.52%)
     
  • CMC Crypto 200

    885.54
    0.00 (0.00%)
     
  • FTSE 100

    7,700.45
    -22.10 (-0.29%)
     
  • Nikkei 225

    40,003.60
    +263.20 (+0.66%)
     

Is Five Below (NASDAQ:FIVE) Likely To Turn Things Around?

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Five Below (NASDAQ:FIVE) and its ROCE trend, we weren't exactly thrilled.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Five Below, this is the formula:

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

0.077 = US$129m ÷ (US$2.2b - US$497m) (Based on the trailing twelve months to October 2020).

So, Five Below has an ROCE of 7.7%. In absolute terms, that's a low return and it also under-performs the Specialty Retail industry average of 13%.

See our latest analysis for Five Below

roce
roce

Above you can see how the current ROCE for Five Below 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 Five Below.

So How Is Five Below's ROCE Trending?

In terms of Five Below's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 32% over the last five years. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

On a side note, Five Below has done well to pay down its current liabilities to 23% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

In Conclusion...

In summary, Five Below is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 408% gain to shareholders who have held over the last five years. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

Five Below does have some risks though, and we've spotted 1 warning sign for Five Below that you might be interested in.

While Five Below 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

Advertisement