Returns On Capital Signal Tricky Times Ahead For YETI Holdings (NYSE:YETI)

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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after briefly looking over the numbers, we don't think YETI Holdings (NYSE:YETI) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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 YETI Holdings, this is the formula:

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

0.12 = US$90m ÷ (US$1.1b - US$345m) (Based on the trailing twelve months to July 2023).

Therefore, YETI Holdings has an ROCE of 12%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Leisure industry average of 15%.

Check out our latest analysis for YETI Holdings

In the above chart we have measured YETI Holdings' 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 YETI Holdings here for free.

What Does the ROCE Trend For YETI Holdings Tell Us?

On the surface, the trend of ROCE at YETI Holdings doesn't inspire confidence. Around five years ago the returns on capital were 26%, but since then they've fallen to 12%. However it looks like YETI Holdings might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

Our Take On YETI Holdings' ROCE

Bringing it all together, while we're somewhat encouraged by YETI Holdings' reinvestment in its own business, we're aware that returns are shrinking. Additionally, the stock's total return to shareholders over the last three years has been flat, which isn't too surprising. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

YETI Holdings does have some risks though, and we've spotted 1 warning sign for YETI Holdings that you might be interested in.

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.