There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Hugo Boss (ETR:BOSS) 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)
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. Analysts use this formula to calculate it for Hugo Boss:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.0061 = €11m ÷ (€2.6b - €804m) (Based on the trailing twelve months to September 2020).
Therefore, Hugo Boss has an ROCE of 0.6%. In absolute terms, that's a low return and it also under-performs the Luxury industry average of 5.5%.
In the above chart we have measured Hugo Boss' 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.
So How Is Hugo Boss' ROCE Trending?
Unfortunately, the trend isn't great with ROCE falling from 40% five years ago, while capital employed has grown 54%. Usually this isn't ideal, but given Hugo Boss conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. Hugo Boss probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.
The Bottom Line
From the above analysis, we find it rather worrisome that returns on capital and sales for Hugo Boss have fallen, meanwhile the business is employing more capital than it was five years ago. It should come as no surprise then that the stock has fallen 58% over the last five years, so it looks like investors are recognizing these changes. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.
Like most companies, Hugo Boss does come with some risks, and we've found 1 warning sign that you should be aware of.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
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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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