Did you know there are some financial metrics that can provide clues of a potential 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after investigating Capri Holdings (NYSE:CPRI), we don't think it's current trends fit the mold of a multi-bagger.
Return On Capital Employed (ROCE): What Is It?
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Capri Holdings, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.14 = US$828m ÷ (US$7.3b - US$1.5b) (Based on the trailing twelve months to April 2023).
Thus, Capri Holdings has an ROCE of 14%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Luxury industry average of 16%.
See our latest analysis for Capri Holdings
Above you can see how the current ROCE for Capri Holdings 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 Capri Holdings here for free.
What Does the ROCE Trend For Capri Holdings Tell Us?
When we looked at the ROCE trend at Capri Holdings, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 14% from 29% five years ago. However it looks like Capri 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.
In Conclusion...
In summary, Capri Holdings is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Since the stock has declined 45% over the last five years, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don't think Capri Holdings has the makings of a multi-bagger.
One more thing to note, we've identified 1 warning sign with Capri Holdings and understanding it should be part of your investment process.
While Capri Holdings isn't earning the highest return, check out this free list of companies that are 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.
About NYSE:CPRI
Capri Holdings
Designs, markets, distributes, and retails branded women’s and men’s apparel, footwear, and accessories in the United States, Canada, Latin America, Europe, the Middle East, Africa, Asia, and the Oceania.
Undervalued with moderate growth potential.
