Here's What Revolve Group's (NYSE:RVLV) Strong Returns On Capital Means
What trends should we look for it we want to identify stocks that can multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, the ROCE of Revolve Group (NYSE:RVLV) looks attractive right now, so lets see what the trend of returns can tell us.
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 Revolve Group is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.31 = US$47m ÷ (US$272m - US$121m) (Based on the trailing twelve months to June 2020).
So, Revolve Group has an ROCE of 31%. That's a fantastic return and not only that, it outpaces the average of 9.5% earned by companies in a similar industry.
Check out our latest analysis for Revolve Group
Above you can see how the current ROCE for Revolve Group 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 Revolve Group.
The Trend Of ROCE
In terms of Revolve Group's history of ROCE, it's quite impressive. The company has consistently earned 31% for the last three years, and the capital employed within the business has risen 236% in that time. With returns that high, it's great that the business can continually reinvest its money at such appealing rates of return. If these trends can continue, it wouldn't surprise us if the company became a multi-bagger.
On a side note, Revolve Group has done well to reduce current liabilities to 44% of total assets over the last three years. This can eliminate some of the risks inherent in the operations because the business has less outstanding obligations to their suppliers and or short-term creditors than they did previously. We'd like to see this trend continue though because as it stands today, thats still a pretty high level.
In Conclusion...
In short, we'd argue Revolve Group has the makings of a multi-bagger since its been able to compound its capital at very profitable rates of return. Yet over the last year the stock has declined 28%, so the decline might provide an opening. For that reason, savvy investors might want to look further into this company in case it's a prime investment.
On a final note, we've found 1 warning sign for Revolve Group that we think you should be aware of.
Revolve Group is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.
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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