Investors Will Want Big 5 Sporting Goods' (NASDAQ:BGFV) Growth In ROCE To Persist
If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. With that in mind, we've noticed some promising trends at Big 5 Sporting Goods (NASDAQ:BGFV) so let's look a bit deeper.
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. Analysts use this formula to calculate it for Big 5 Sporting Goods:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.16 = US$71m ÷ (US$700m - US$240m) (Based on the trailing twelve months to January 2021).
Therefore, Big 5 Sporting Goods has an ROCE of 16%. On its own, that's a standard return, however it's much better than the 13% generated by the Specialty Retail industry.
See our latest analysis for Big 5 Sporting Goods
In the above chart we have measured Big 5 Sporting Goods' prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
So How Is Big 5 Sporting Goods' ROCE Trending?
We like the trends that we're seeing from Big 5 Sporting Goods. The data shows that returns on capital have increased substantially over the last five years to 16%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 62%. So we're very much inspired by what we're seeing at Big 5 Sporting Goods thanks to its ability to profitably reinvest capital.
The Bottom Line
All in all, it's terrific to see that Big 5 Sporting Goods is reaping the rewards from prior investments and is growing its capital base. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. In light of that, we think it's worth looking further into this stock because if Big 5 Sporting Goods can keep these trends up, it could have a bright future ahead.
Big 5 Sporting Goods does have some risks though, and we've spotted 3 warning signs for Big 5 Sporting Goods that you might be interested in.
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.
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