Why You Should Care About Shoe Zone's (LON:SHOE) Strong Returns On Capital

There are a few key trends to look for if we want to identify the next multi-bagger. 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. Ergo, when we looked at the ROCE trends at Shoe Zone (LON:SHOE), we liked what we saw.

We've discovered 4 warning signs about Shoe Zone. View them for free.

Return On Capital Employed (ROCE): What Is It?

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 Shoe Zone is:

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

0.20 = UK£12m ÷ (UK£101m - UK£40m) (Based on the trailing twelve months to September 2024).

So, Shoe Zone has an ROCE of 20%. In absolute terms that's a great return and it's even better than the Specialty Retail industry average of 13%.

Check out our latest analysis for Shoe Zone

Above you can see how the current ROCE for Shoe Zone compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Shoe Zone for free.

So How Is Shoe Zone's ROCE Trending?

It's hard not to be impressed by Shoe Zone's returns on capital. The company has consistently earned 20% for the last five years, and the capital employed within the business has risen 37% in that time. Now considering ROCE is an attractive 20%, this combination is actually pretty appealing because it means the business can consistently put money to work and generate these high returns. If Shoe Zone can keep this up, we'd be very optimistic about its future.

On a side note, Shoe Zone's current liabilities are still rather high at 40% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

What We Can Learn From Shoe Zone's ROCE

Shoe Zone has demonstrated its proficiency by generating high returns on increasing amounts of capital employed, which we're thrilled about. And since the stock has risen strongly over the last five years, it appears the market might expect this trend to continue. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.

Shoe Zone does have some risks, we noticed 4 warning signs (and 1 which doesn't sit too well with us) we think you should know about.

High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.

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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.