What are the early trends we should look for to identify a stock that could multiply in value over the long term? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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. Speaking of which, we noticed some great changes in Deckers Outdoor's (NYSE:DECK) returns on capital, so let's have a look.
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. Analysts use this formula to calculate it for Deckers Outdoor:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.37 = US$890m ÷ (US$3.3b - US$927m) (Based on the trailing twelve months to December 2023).
Therefore, Deckers Outdoor has an ROCE of 37%. That's a fantastic return and not only that, it outpaces the average of 12% earned by companies in a similar industry.
Above you can see how the current ROCE for Deckers Outdoor 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 Deckers Outdoor for free.
What Does the ROCE Trend For Deckers Outdoor Tell Us?
The trends we've noticed at Deckers Outdoor are quite reassuring. Over the last five years, returns on capital employed have risen substantially to 37%. Basically the business is earning more per dollar of capital invested and in addition to that, 111% more capital is being employed now too. So we're very much inspired by what we're seeing at Deckers Outdoor thanks to its ability to profitably reinvest capital.
The Bottom Line On Deckers Outdoor's 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 Deckers Outdoor has. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. In light of that, we think it's worth looking further into this stock because if Deckers Outdoor can keep these trends up, it could have a bright future ahead.
Deckers Outdoor does have some risks though, and we've spotted 1 warning sign for Deckers Outdoor that you might be interested in.
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.
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