To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, 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. So when we looked at Signet Jewelers (NYSE:SIG) and its trend of ROCE, we really liked what we saw.
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 Signet Jewelers, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.16 = US$662m ÷ (US$6.1b - US$1.9b) (Based on the trailing twelve months to July 2023).
Thus, Signet Jewelers has an ROCE of 16%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Specialty Retail industry average of 13%.
View our latest analysis for Signet Jewelers
In the above chart we have measured Signet Jewelers' 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 report for Signet Jewelers.
So How Is Signet Jewelers' ROCE Trending?
Signet Jewelers has not disappointed with their ROCE growth. Looking at the data, we can see that even though capital employed in the business has remained relatively flat, the ROCE generated has risen by 31% over the last five years. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.
Our Take On Signet Jewelers' ROCE
To sum it up, Signet Jewelers is collecting higher returns from the same amount of capital, and that's impressive. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 37% to shareholders. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.
Signet Jewelers does have some risks though, and we've spotted 1 warning sign for Signet Jewelers that you might be interested in.
While Signet Jewelers 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.
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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.