Returns Are Gaining Momentum At Accent Group (ASX:AX1)

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. So on that note, Accent Group (ASX:AX1) looks quite promising in regards to its trends of return on capital.

Understanding Return On Capital Employed (ROCE)

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. Analysts use this formula to calculate it for Accent Group:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.15 = AU$116m ÷ (AU$1.0b - AU$283m) (Based on the trailing twelve months to December 2020).

So, Accent Group has an ROCE of 15%. In isolation, that's a pretty standard return but against the Specialty Retail industry average of 20%, it's not as good.

Check out our latest analysis for Accent Group

In the above chart we have measured Accent Group's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Accent Group here for free.

What Does the ROCE Trend For Accent Group Tell Us?

Investors would be pleased with what's happening at Accent Group. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 15%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 120%. So we're very much inspired by what we're seeing at Accent Group thanks to its ability to profitably reinvest capital.

The Key Takeaway

In summary, it's great to see that Accent Group can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. Therefore, we think it would be worth your time to check if these trends are going to continue.

On a final note, we've found 1 warning sign for Accent Group that we think you should be aware of.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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