Stock Analysis

What Do The Returns On Capital At Shoe Zone (LON:SHOE) Tell Us?

  •  Updated
AIM:SHOE
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There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. Having said that, from a first glance at Shoe Zone (LON:SHOE) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What is 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. Analysts use this formula to calculate it for Shoe Zone:

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

0.085 = UK£7.1m ÷ (UK£115m - UK£32m) (Based on the trailing twelve months to April 2020).

So, Shoe Zone has an ROCE of 8.5%. Ultimately, that's a low return and it under-performs the Specialty Retail industry average of 12%.

View our latest analysis for Shoe Zone

roce
AIM:SHOE Return on Capital Employed December 8th 2020

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Shoe Zone has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

On the surface, the trend of ROCE at Shoe Zone doesn't inspire confidence. Over the last five years, returns on capital have decreased to 8.5% from 26% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. 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.

In Conclusion...

In summary, Shoe Zone is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And in the last five years, the stock has given away 65% so the market doesn't look too hopeful on these trends strengthening any time soon. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

Shoe Zone does have some risks, we noticed 5 warning signs (and 1 which is a bit unpleasant) we think you should know about.

While Shoe Zone 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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