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Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, the ROCE of Williams-Sonoma (NYSE:WSM) looks great, so lets see what the trend can tell us.
Understanding Return On Capital Employed (ROCE)
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Williams-Sonoma is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.44 = US$1.1b ÷ (US$4.1b - US$1.5b) (Based on the trailing twelve months to May 2021).
Thus, Williams-Sonoma has an ROCE of 44%. In absolute terms that's a great return and it's even better than the Specialty Retail industry average of 15%.
Above you can see how the current ROCE for Williams-Sonoma compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Williams-Sonoma.
What Can We Tell From Williams-Sonoma's ROCE Trend?
Investors would be pleased with what's happening at Williams-Sonoma. Over the last five years, returns on capital employed have risen substantially to 44%. The amount of capital employed has increased too, by 83%. So we're very much inspired by what we're seeing at Williams-Sonoma thanks to its ability to profitably reinvest capital.
The Bottom Line
In summary, it's great to see that Williams-Sonoma can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. Since the stock has returned a staggering 237% to shareholders over the last five years, it looks like investors are recognizing these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.
On a separate note, we've found 1 warning sign for Williams-Sonoma you'll probably want to know about.
High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.
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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