To find a multi-bagger stock, what are the underlying trends we should look for in a business? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at PVH (NYSE:PVH) and its trend of ROCE, we really liked what we saw.
What Is 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. To calculate this metric for PVH, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.11 = US$935m ÷ (US$11b - US$2.8b) (Based on the trailing twelve months to August 2024).
So, PVH has an ROCE of 11%. That's a relatively normal return on capital, and it's around the 13% generated by the Luxury industry.
View our latest analysis for PVH
In the above chart we have measured PVH's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering PVH for free.
How Are Returns Trending?
You'd find it hard not to be impressed with the ROCE trend at PVH. The figures show that over the last five years, returns on capital have grown by 33%. That's a very favorable trend because this means that the company is earning more per dollar of capital that's being employed. Interestingly, the business may be becoming more efficient because it's applying 26% less capital than it was five years ago. If this trend continues, the business might be getting more efficient but it's shrinking in terms of total assets.
The Key Takeaway
From what we've seen above, PVH has managed to increase it's returns on capital all the while reducing it's capital base. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 11% to shareholders. So with that in mind, we think the stock deserves further research.
On the other side of ROCE, we have to consider valuation. That's why we have a FREE intrinsic value estimation for PVH on our platform that is definitely worth checking out.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
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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:PVH
PVH
Operates as an apparel company in the United States and internationally.
Flawless balance sheet and undervalued.
