YETI Holdings (NYSE:YETI) Might Become A Compounding Machine

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. Ergo, when we looked at the ROCE trends at YETI Holdings (NYSE:YETI), we liked what we saw.

Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for YETI Holdings:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.25 = US$225m ÷ (US$1.3b - US$398m) (Based on the trailing twelve months to December 2023).

Thus, YETI Holdings has an ROCE of 25%. In absolute terms that's a great return and it's even better than the Leisure industry average of 16%.

View our latest analysis for YETI Holdings

In the above chart we have measured YETI Holdings' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for YETI Holdings .

How Are Returns Trending?

It's hard not to be impressed by YETI Holdings' returns on capital. The company has employed 175% more capital in the last five years, and the returns on that capital have remained stable at 25%. With returns that high, it's great that the business can continually reinvest its money at such appealing rates of return. You'll see this when looking at well operated businesses or favorable business models.

The Bottom Line

YETI Holdings has demonstrated its proficiency by generating high returns on increasing amounts of capital employed, which we're thrilled about. However, over the last five years, the stock has only delivered a 20% return to shareholders who held over that period. So to determine if YETI Holdings is a multi-bagger going forward, we'd suggest digging deeper into the company's other fundamentals.

On the other side of ROCE, we have to consider valuation. That's why we have a FREE intrinsic value estimation for YETI on our platform that is definitely worth checking out.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.

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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.