Some Investors May Be Worried About Skechers U.S.A's (NYSE:SKX) Returns On Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. In light of that, when we looked at Skechers U.S.A (NYSE:SKX) and its ROCE trend, we weren't exactly thrilled.

What is Return On Capital Employed (ROCE)?

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 Skechers U.S.A, this is the formula:

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

0.056 = US$266m ÷ (US$6.0b - US$1.3b) (Based on the trailing twelve months to March 2021).

So, Skechers U.S.A has an ROCE of 5.6%. In absolute terms, that's a low return and it also under-performs the Luxury industry average of 10%.

Check out our latest analysis for Skechers U.S.A

Above you can see how the current ROCE for Skechers U.S.A 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.

What Can We Tell From Skechers U.S.A's ROCE Trend?

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 25%, but since then they've fallen to 5.6%. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

In Conclusion...

In summary, Skechers U.S.A 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 gained an impressive 89% over the last five years, investors must think there's better things to come. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

Skechers U.S.A does have some risks though, and we've spotted 2 warning signs for Skechers U.S.A that you might be interested in.

While Skechers U.S.A may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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