Should You Be Impressed By Steven Madden's (NASDAQ:SHOO) Returns on Capital?
If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at Steven Madden (NASDAQ:SHOO) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
What is 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 Steven Madden is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.057 = US$52m ÷ (US$1.1b - US$182m) (Based on the trailing twelve months to September 2020).
Thus, Steven Madden has an ROCE of 5.7%. In absolute terms, that's a low return and it also under-performs the Luxury industry average of 11%.
See our latest analysis for Steven Madden
Above you can see how the current ROCE for Steven Madden 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 Steven Madden here for free.
How Are Returns Trending?
On the surface, the trend of ROCE at Steven Madden doesn't inspire confidence. Around five years ago the returns on capital were 23%, but since then they've fallen to 5.7%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.
The Bottom Line On Steven Madden's ROCE
From the above analysis, we find it rather worrisome that returns on capital and sales for Steven Madden have fallen, meanwhile the business is employing more capital than it was five years ago. In spite of that, the stock has delivered a 10% return to shareholders who held over the last five years. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.
While Steven Madden doesn't shine too bright in this respect, it's still worth seeing if the company is trading at attractive prices. You can find that out with our FREE intrinsic value estimation on our platform.
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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com.
