What are the early trends we should look for to identify a stock that could multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So while Carter’s (NYSE:CRI) has a high ROCE right now, lets see what we can decipher from how returns are changing.
Return On Capital Employed (ROCE): What Is It?
For those who don’t know, ROCE is a measure of a company’s yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Carter’s is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.20 = US$412m ÷ (US$2.6b – US$566m) (Based on the trailing twelve months to October 2022).
So, Carter’s has an ROCE of 20%. In absolute terms that’s a great return and it’s even better than the Luxury industry average of 15%.
Check out the opportunities and risks within the US Luxury industry.
In the above chart we have measured Carter’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 report for Carter’s.
How Are Returns Trending?
There hasn’t been much to report for Carter’s’ returns and its level of capital employed because both metrics have been steady for the past five years. Businesses with these traits tend to be mature and steady operations because they’re past the growth phase. Although current returns are high, we’d need more evidence of underlying growth for it to look like a multi-bagger going forward. This probably explains why Carter’s is paying out 41% of its income to shareholders in the form of dividends. Unless businesses have highly compelling growth opportunities, they’ll typically return some money to shareholders.
What We Can Learn From Carter’s’ ROCE
Although is allocating it’s capital efficiently to generate impressive returns, it isn’t compounding its base of capital, which is what we’d see from a multi-bagger. And investors appear hesitant that the trends will pick up because the stock has fallen 24% in the last five years. Therefore based on the analysis done in this article, we don’t think Carter’s has the makings of a multi-bagger.
One final note, you should learn about the 4 warning signs we’ve spotted with Carter’s (including 3 which are potentially serious) .
Carter’s 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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Find out whether Carter’s is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.
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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.