The Trends At Crown Crafts (NASDAQ:CRWS) That You Should Know About
To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. In light of that, when we looked at Crown Crafts (NASDAQ:CRWS) and its ROCE trend, we weren't exactly thrilled.
Understanding 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. Analysts use this formula to calculate it for Crown Crafts:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.18 = US$9.2m ÷ (US$64m - US$13m) (Based on the trailing twelve months to September 2020).
Thus, Crown Crafts has an ROCE of 18%. In absolute terms, that's a satisfactory return, but compared to the Luxury industry average of 14% it's much better.
Check out our latest analysis for Crown Crafts
In the above chart we have measured Crown Crafts' prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Crown Crafts here for free.
The Trend Of ROCE
When we looked at the ROCE trend at Crown Crafts, we didn't gain much confidence. To be more specific, ROCE has fallen from 28% over the last five years. However it looks like Crown Crafts 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's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.
The Bottom Line On Crown Crafts' ROCE
To conclude, we've found that Crown Crafts is reinvesting in the business, but returns have been falling. And with the stock having returned a mere 32% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.
One more thing: We've identified 3 warning signs with Crown Crafts (at least 1 which makes us a bit uncomfortable) , and understanding these would certainly be useful.
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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