Canada Goose Holdings' (TSE:GOOS) Returns On Capital Not Reflecting Well On The Business

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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 Canada Goose Holdings (TSE:GOOS) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding 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. The formula for this calculation on Canada Goose Holdings is:

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

0.15 = CA$168m ÷ (CA$1.5b - CA$320m) (Based on the trailing twelve months to June 2024).

Therefore, Canada Goose Holdings has an ROCE of 15%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Luxury industry average of 13%.

Check out our latest analysis for Canada Goose Holdings

In the above chart we have measured Canada Goose Holdings' 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 analyst report for Canada Goose Holdings .

What The Trend Of ROCE Can Tell Us

In terms of Canada Goose Holdings' historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 15% from 22% five years ago. However it looks like Canada Goose Holdings might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. 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.

The Bottom Line

Bringing it all together, while we're somewhat encouraged by Canada Goose Holdings' reinvestment in its own business, we're aware that returns are shrinking. And investors appear hesitant that the trends will pick up because the stock has fallen 70% in the last five years. Therefore based on the analysis done in this article, we don't think Canada Goose Holdings has the makings of a multi-bagger.

One more thing to note, we've identified 2 warning signs with Canada Goose Holdings and understanding these should be part of your investment process.

While Canada Goose Holdings may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.