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Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. So on that note, Guess' (NYSE:GES) looks quite promising in regards to its trends of return on capital.
What is Return On Capital Employed (ROCE)?
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Guess', this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.17 = US$290m ÷ (US$2.6b - US$818m) (Based on the trailing twelve months to January 2022).
Thus, Guess' has an ROCE of 17%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Specialty Retail industry average of 19%.
In the above chart we have measured Guess''s 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 Guess'.
So How Is Guess''s ROCE Trending?
We like the trends that we're seeing from Guess'. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 17%. 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 46%. So we're very much inspired by what we're seeing at Guess' thanks to its ability to profitably reinvest capital.
What We Can Learn From Guess''s ROCE
A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Guess' has. And a remarkable 140% total return over the last five years tells us that investors are expecting more good things to come in the future. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.
Guess' does have some risks though, and we've spotted 1 warning sign for Guess' that you might be interested in.
While Guess' isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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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.