Returns On Capital Signal Tricky Times Ahead For Sportsman's Warehouse Holdings (NASDAQ:SPWH)
If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. In light of that, when we looked at Sportsman's Warehouse Holdings (NASDAQ:SPWH) and its ROCE trend, we weren't exactly thrilled.
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. The formula for this calculation on Sportsman's Warehouse Holdings is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.064 = US$37m ÷ (US$982m - US$400m) (Based on the trailing twelve months to April 2023).
Therefore, Sportsman's Warehouse Holdings has an ROCE of 6.4%. Ultimately, that's a low return and it under-performs the Specialty Retail industry average of 14%.
See our latest analysis for Sportsman's Warehouse Holdings
In the above chart we have measured Sportsman's Warehouse Holdings' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Sportsman's Warehouse Holdings.
What Does the ROCE Trend For Sportsman's Warehouse Holdings Tell Us?
In terms of Sportsman's Warehouse Holdings' historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 6.4% from 23% five years ago. However it looks like Sportsman's Warehouse Holdings might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.
On a separate but related note, it's important to know that Sportsman's Warehouse Holdings has a current liabilities to total assets ratio of 41%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.
What We Can Learn From Sportsman's Warehouse Holdings' ROCE
To conclude, we've found that Sportsman's Warehouse Holdings is reinvesting in the business, but returns have been falling. And with the stock having returned a mere 12% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.
If you'd like to know more about Sportsman's Warehouse Holdings, we've spotted 2 warning signs, and 1 of them makes us a bit uncomfortable.
While Sportsman's Warehouse Holdings may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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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