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There are a few key trends to look for if we want to identify the next multi-bagger. 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. And in light of that, the trends we're seeing at DICK'S Sporting Goods' (NYSE:DKS) look very promising so lets take a look.
What is Return On Capital Employed (ROCE)?
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on DICK'S Sporting Goods is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.30 = US$1.9b ÷ (US$9.2b - US$2.8b) (Based on the trailing twelve months to April 2022).
So, DICK'S Sporting Goods has an ROCE of 30%. In absolute terms that's a great return and it's even better than the Specialty Retail industry average of 18%.
In the above chart we have measured DICK'S Sporting Goods' 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 DICK'S Sporting Goods here for free.
So How Is DICK'S Sporting Goods' ROCE Trending?
DICK'S Sporting Goods is displaying some positive trends. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 30%. Basically the business is earning more per dollar of capital invested and in addition to that, 128% more capital is being employed now too. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.
The Bottom Line On DICK'S Sporting Goods' ROCE
All in all, it's terrific to see that DICK'S Sporting Goods is reaping the rewards from prior investments and is growing its capital base. And a remarkable 126% total return over the last five years tells us that investors are expecting more good things to come in the future. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.
DICK'S Sporting Goods does come with some risks though, we found 4 warning signs in our investment analysis, and 1 of those is significant...
If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.
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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.