Returns On Capital Are A Standout For Skyline Champion (NYSE:SKY)

There are a few key trends to look for if we want to identify the next 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. And in light of that, the trends we're seeing at Skyline Champion's (NYSE:SKY) look very promising so lets take a look.

Understanding 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 Skyline Champion is:

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

0.45 = US$566m ÷ (US$1.5b - US$260m) (Based on the trailing twelve months to December 2022).

Thus, Skyline Champion has an ROCE of 45%. In absolute terms that's a great return and it's even better than the Consumer Durables industry average of 17%.

See our latest analysis for Skyline Champion

Above you can see how the current ROCE for Skyline Champion 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 Skyline Champion here for free.

How Are Returns Trending?

The trends we've noticed at Skyline Champion are quite reassuring. The data shows that returns on capital have increased substantially over the last five years to 45%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 470%. So we're very much inspired by what we're seeing at Skyline Champion thanks to its ability to profitably reinvest capital.

One more thing to note, Skyline Champion has decreased current liabilities to 17% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance.

Our Take On Skyline Champion's ROCE

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Skyline Champion has. And with the stock having performed exceptionally well over the last three years, these patterns are being accounted for by investors. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

Skyline Champion does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those shouldn't be ignored...

Skyline Champion is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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.