Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. That's why when we briefly looked at NIKE's (NYSE:NKE) ROCE trend, we were very happy with what we saw.
What Is Return On Capital Employed (ROCE)?
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for NIKE, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.25 = US$6.8b ÷ (US$38b - US$11b) (Based on the trailing twelve months to May 2024).
Therefore, NIKE has an ROCE of 25%. 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 NIKE's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for NIKE .
The Trend Of ROCE
In terms of NIKE's history of ROCE, it's quite impressive. Over the past five years, ROCE has remained relatively flat at around 25% and the business has deployed 74% more capital into its operations. 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.
In Conclusion...
In the end, the company has proven it can reinvest it's capital at high rates of returns, which you'll remember is a trait of a multi-bagger. Despite the good fundamentals, total returns from the stock have been virtually flat over the last five years. That's why we think it'd be worthwhile to look further into this stock given the fundamentals are appealing.
While NIKE looks impressive, no company is worth an infinite price. The intrinsic value infographic for NKE helps visualize whether it is currently trading for a fair price.
NIKE 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.
