To find a multi-bagger stock, what are the underlying trends we should look for in a business? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in Deckers Outdoor's (NYSE:DECK) returns on capital, so let's have a look.
Understanding 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 Deckers Outdoor, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.39 = US$937m ÷ (US$3.1b - US$720m) (Based on the trailing twelve months to March 2024).
So, Deckers Outdoor has an ROCE of 39%. That's a fantastic return and not only that, it outpaces the average of 13% earned by companies in a similar industry.
In the above chart we have measured Deckers Outdoor's 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 Deckers Outdoor .
The Trend Of ROCE
Deckers Outdoor is displaying some positive trends. The data shows that returns on capital have increased substantially over the last five years to 39%. The amount of capital employed has increased too, by 105%. 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
To sum it up, Deckers Outdoor has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And a remarkable 447% total return over the last five years tells us that investors are expecting more good things to come in the future. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.
Like most companies, Deckers Outdoor does come with some risks, and we've found 1 warning sign that you should be aware of.
Deckers Outdoor 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.
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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.
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