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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. With that in mind, we've noticed some promising trends at Conn's (NASDAQ:CONN) so let's look a bit deeper.
What is 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. To calculate this metric for Conn's, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.083 = US$122m ÷ (US$1.7b - US$218m) (Based on the trailing twelve months to April 2021).
Therefore, Conn's has an ROCE of 8.3%. Ultimately, that's a low return and it under-performs the Specialty Retail industry average of 15%.NasdaqGS:CONN Return on Capital Employed July 20th 2021
Above you can see how the current ROCE for Conn's compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Conn's here for free.
What Can We Tell From Conn's' ROCE Trend?
We're pretty happy with how the ROCE has been trending at Conn's. We found that the returns on capital employed over the last five years have risen by 710%. The company is now earning US$0.08 per dollar of capital employed. Speaking of capital employed, the company is actually utilizing 20% less than it was five years ago, which can be indicative of a business that's improving its efficiency. A business that's shrinking its asset base like this isn't usually typical of a soon to be multi-bagger company.
The Bottom Line
In a nutshell, we're pleased to see that Conn's has been able to generate higher returns from less capital. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. 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.
Conn's does come with some risks though, we found 4 warning signs in our investment analysis, and 1 of those is significant...
While Conn's may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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.
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 StoryCONN
Latest Nasdaq-Listed Companies Videos
- Is It Time To Consider Buying QUALCOMM Incorporated (NASDAQ:QCOM)?
- With A 4.0% Return On Equity, Is Greenidge Generation Holdings Inc. (NASDAQ:GREE) A Quality Stock?
- This Insider Has Just Sold Shares In Pacific Biosciences of California, Inc. (NASDAQ:PACB)
- We Think Confluent (NASDAQ:CFLT) Can Easily Afford To Drive Business Growth