What are the early trends we should look for to identify a stock that could multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. And in light of that, the trends we're seeing at Academy Sports and Outdoors' (NASDAQ:ASO) look very promising so lets take 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 Academy Sports and Outdoors:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.26 = US$908m ÷ (US$4.6b - US$1.1b) (Based on the trailing twelve months to January 2022).
So, Academy Sports and Outdoors has an ROCE of 26%. In absolute terms that's a great return and it's even better than the Specialty Retail industry average of 18%.
Above you can see how the current ROCE for Academy Sports and Outdoors 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 Academy Sports and Outdoors here for free.
The Trend Of ROCE
Academy Sports and Outdoors' ROCE growth is quite impressive. The figures show that over the last two years, ROCE has grown 414% whilst employing roughly the same amount of capital. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.
The Bottom Line On Academy Sports and Outdoors' ROCE
To bring it all together, Academy Sports and Outdoors has done well to increase the returns it's generating from its capital employed. And given the stock has remained rather flat over the last year, there might be an opportunity here if other metrics are strong. So researching this company further and determining whether or not these trends will continue seems justified.
Academy Sports and Outdoors does have some risks though, and we've spotted 1 warning sign for Academy Sports and Outdoors 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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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.