NIKE (NYSE:NKE) Is Reinvesting To Multiply In Value

April 08, 2023

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. With that in mind, the ROCE of NIKE (NYSE:NKE) looks attractive right now, so lets see what the trend of returns can tell us.

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

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 NIKE:

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

0.21 = US$6.2b ÷ (US$38b - US$9.5b) (Based on the trailing twelve months to February 2023).

Thus, NIKE has an ROCE of 21%. That's a fantastic return and not only that, it outpaces the average of 16% earned by companies in a similar industry.

Check out our latest analysis for NIKE

Above you can see how the current ROCE for NIKE compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

SWOT Analysis for NIKE

Strength

Debt is not viewed as a risk.

Balance sheet summary for NKE.

Weakness

Earnings declined over the past year.

Dividend is low compared to the top 25% of dividend payers in the Luxury market.

Expensive based on P/E ratio and estimated fair value.

Opportunity

Annual revenue is forecast to grow faster than the American market.

Threat

Dividends are not covered by cash flow.

Annual earnings are forecast to grow slower than the American market.

See NKE's dividend history.

The Trend Of ROCE

NIKE deserves to be commended in regards to it's returns. The company has consistently earned 21% for the last five years, and the capital employed within the business has risen 71% in that time. With returns that high, it's great that the business can continually reinvest its money at such appealing rates of return. If NIKE can keep this up, we'd be very optimistic about its future.

Our Take On NIKE's ROCE

In the end, the company has proven it can reinvest it's capital at high rates of returns, which you'll remember is a trait of a multi-bagger. And since the stock has risen strongly over the last five years, it appears the market might expect this trend to continue. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.

While NIKE looks impressive, no company is worth an infinite price. The intrinsic value infographic in our free research report helps visualize whether NKE is currently trading for a fair price.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.

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Valuation is complex, but we're here to simplify it.

Discover if NIKE might be undervalued or overvalued with our detailed analysis, featuring fair value estimates, potential risks, dividends, insider trades, and its financial condition.

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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.