If you’re not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at PVH (NYSE:PVH) and its ROCE trend, we weren’t exactly thrilled.
Return On Capital Employed (ROCE): What Is It?
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 PVH, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.099 = US$940m ÷ (US$12b – US$2.4b) (Based on the trailing twelve months to May 2022).
Thus, PVH has an ROCE of 9.9%. In absolute terms, that’s a low return and it also under-performs the Luxury industry average of 15%.
Check out our latest analysis for PVH
In the above chart we have measured PVH’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 report on analyst forecasts for the company.
What Does the ROCE Trend For PVH Tell Us?
There hasn’t been much to report for PVH’s returns and its level of capital employed because both metrics have been steady for the past five years. This tells us the company isn’t reinvesting in itself, so it’s plausible that it’s past the growth phase. With that in mind, unless investment picks up again in the future, we wouldn’t expect PVH to be a multi-bagger going forward.
Our Take On PVH’s ROCE
We can conclude that in regards to PVH’s returns on capital employed and the trends, there isn’t much change to report on. And investors appear hesitant that the trends will pick up because the stock has fallen 50% in the last five years. In any case, the stock doesn’t have these traits of a multi-bagger discussed above, so if that’s what you’re looking for, we think you’d have more luck elsewhere.
PVH could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation on our platform quite valuable.
While PVH isn’t earning the highest return, check out this free list of companies that are 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.
