To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, 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. Speaking of which, we noticed some great changes in DICK'S Sporting Goods' (NYSE:DKS) returns on capital, so let's have a look.
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. Analysts use this formula to calculate it for DICK'S Sporting Goods:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.31 = US$1.8b ÷ (US$8.4b - US$2.6b) (Based on the trailing twelve months to July 2021).
Therefore, DICK'S Sporting Goods has an ROCE of 31%. In absolute terms that's a great return and it's even better than the Specialty Retail industry average of 18%.NYSE:DKS Return on Capital Employed October 14th 2021
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're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
So How Is DICK'S Sporting Goods' ROCE Trending?
The trends we've noticed at DICK'S Sporting Goods are quite reassuring. Over the last five years, returns on capital employed have risen substantially to 31%. 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 117%. 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
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 DICK'S Sporting Goods has. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.
DICK'S Sporting Goods does have some risks, we noticed 3 warning signs (and 1 which is a bit unpleasant) we think you should know about.
DICK'S Sporting Goods is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.
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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
In This StoryDKS
Latest Companies Videos
- Independent Director David Taylor Just Bought 21% More Shares In Delta Air Lines, Inc. (NYSE:DAL)
- Some Alibaba Group Holding Limited (NYSE:BABA) Shareholders Look For Exit As Shares Take 28% Pounding
- Investors might be losing patience for Teladoc Health's (NYSE:TDOC) increasing losses, as stock sheds 6.3% over the past week
- It looks like Institutional investors are warming to Palantir Technologies Inc. (NYSE:PLTR)