What trends should we look for it we want to identify stocks that can multiply in value over the long term? Amongst other things, we’ll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company’s 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. However, after briefly looking over the numbers, we don’t think Carter’s (NYSE:CRI) has the makings of a multi-bagger going forward, but let’s have a look at why that may be.
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. To calculate this metric for Carter’s, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.11 = US$309m ÷ (US$3.2b – US$428m) (Based on the trailing twelve months to March 2020).
Therefore, Carter’s has an ROCE of 11%. In absolute terms, that’s a pretty normal return, and it’s somewhat close to the Luxury industry average of 12%.
Above you can the how the current ROCE for Carter’s’ compares to it’s prior returns on capital, but you can only tell so much from the past. If you’re interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
So How Is Carter’s’ ROCE Trending?
When we looked at the ROCE trend at Carter’s, we didn’t gain much confidence. To be more specific, ROCE has fallen from 22% over the last five years. Meanwhile, the business is utilizing more capital but this hasn’t moved the needle much in terms of sales, so this could reflect longer term investments. It’s worth keeping an eye on the company’s earnings from here on to see if these investments do end up contributing to the bottom line.
What We Can Learn From Carter’s’ ROCE
To conclude, we’ve found that Carter’s is reinvesting in the business, but returns have been falling. Since the stock has declined 23% over the last five years, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don’t think Carter’s has the makings of a multi-bagger.
Like most companies, Carter’s does come with some risks, and we’ve found 3 warning signs that you should be aware of.
While Carter’s 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. 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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