U.S. Markets closed
  • S&P Futures

    3,629.00
    -7.50 (-0.21%)
     
  • Dow Futures

    29,765.00
    -109.00 (-0.36%)
     
  • Nasdaq Futures

    12,277.50
    +20.00 (+0.16%)
     
  • Russell 2000 Futures

    1,844.90
    -8.10 (-0.44%)
     
  • Crude Oil

    45.09
    -0.44 (-0.97%)
     
  • Gold

    1,780.50
    -7.60 (-0.43%)
     
  • Silver

    22.33
    -0.30 (-1.34%)
     
  • EUR/USD

    1.1970
    0.0000 (-0.0000%)
     
  • 10-Yr Bond

    0.8420
    -0.0360 (-4.10%)
     
  • Vix

    20.84
    -0.41 (-1.93%)
     
  • GBP/USD

    1.3335
    +0.0021 (+0.1587%)
     
  • USD/JPY

    103.8900
    -0.1950 (-0.1873%)
     
  • BTC-USD

    18,494.22
    +142.78 (+0.78%)
     
  • CMC Crypto 200

    364.92
    +27.42 (+8.13%)
     
  • FTSE 100

    6,367.58
    +4.65 (+0.07%)
     
  • Nikkei 225

    26,666.91
    +22.20 (+0.08%)
     

Here's What To Make Of Urban Outfitters' (NASDAQ:URBN) Returns On Capital

Simply Wall St
·3 min read

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Having said that, from a first glance at Urban Outfitters (NASDAQ:URBN) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper 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. To calculate this metric for Urban Outfitters, this is the formula:

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

0.013 = US$36m ÷ (US$3.4b - US$664m) (Based on the trailing twelve months to July 2020).

Thus, Urban Outfitters has an ROCE of 1.3%. Ultimately, that's a low return and it under-performs the Specialty Retail industry average of 9.2%.

See our latest analysis for Urban Outfitters

roce
roce

Above you can see how the current ROCE for Urban Outfitters compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Urban Outfitters here for free.

The Trend Of ROCE

When we looked at the ROCE trend at Urban Outfitters, we didn't gain much confidence. Around five years ago the returns on capital were 22%, but since then they've fallen to 1.3%. 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.

Our Take On Urban Outfitters' ROCE

Bringing it all together, while we're somewhat encouraged by Urban Outfitters' reinvestment in its own business, we're aware that returns are shrinking. And in the last five years, the stock has given away 32% so the market doesn't look too hopeful on these trends strengthening any time soon. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

One more thing, we've spotted 1 warning sign facing Urban Outfitters that you might find interesting.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.

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