Skechers U.S.A (NYSE:SKX) Could Be Struggling To Allocate Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. Having said that, from a first glance at Skechers U.S.A (NYSE:SKX) 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)?

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. The formula for this calculation on Skechers U.S.A is:

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

0.11 = US$594m ÷ (US$7.0b - US$1.5b) (Based on the trailing twelve months to March 2023).

So, Skechers U.S.A has an ROCE of 11%. In isolation, that's a pretty standard return but against the Luxury industry average of 14%, it's not as good.

See our latest analysis for Skechers U.S.A

In the above chart we have measured Skechers U.S.A'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 Skechers U.S.A here for free.

SWOT Analysis for Skechers U.S.A

So How Is Skechers U.S.A's ROCE Trending?

On the surface, the trend of ROCE at Skechers U.S.A doesn't inspire confidence. Around five years ago the returns on capital were 18%, but since then they've fallen to 11%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

What We Can Learn From Skechers U.S.A's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Skechers U.S.A is reinvesting for growth and has higher sales as a result. And the stock has followed suit returning a meaningful 64% to shareholders over the last five years. So should these growth trends continue, we'd be optimistic on the stock going forward.

If you'd like to know about the risks facing Skechers U.S.A, we've discovered 3 warning signs that you should be aware of.

While Skechers U.S.A 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.