Stock Analysis

BJ's Wholesale Club Holdings (NYSE:BJ) Might Have The Makings Of A Multi-Bagger

NYSE:BJ
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What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So on that note, BJ's Wholesale Club Holdings (NYSE:BJ) looks quite promising in regards to its trends of return on capital.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on BJ's Wholesale Club Holdings is:

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

0.19 = US$718m ÷ (US$6.5b - US$2.6b) (Based on the trailing twelve months to October 2022).

Thus, BJ's Wholesale Club Holdings has an ROCE of 19%. On its own, that's a standard return, however it's much better than the 11% generated by the Consumer Retailing industry.

Check out our latest analysis for BJ's Wholesale Club Holdings

roce
NYSE:BJ Return on Capital Employed January 25th 2023

In the above chart we have measured BJ's Wholesale Club 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 BJ's Wholesale Club Holdings here for free.

How Are Returns Trending?

The trends we've noticed at BJ's Wholesale Club Holdings are quite reassuring. Over the last five years, returns on capital employed have risen substantially to 19%. The amount of capital employed has increased too, by 108%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

On a side note, BJ's Wholesale Club Holdings' current liabilities are still rather high at 40% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line

In summary, it's great to see that BJ's Wholesale Club Holdings can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. Since the stock has returned a staggering 232% to shareholders over the last three years, it looks like investors are recognizing these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

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

While BJ's Wholesale Club Holdings isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

Valuation is complex, but we're helping make it simple.

Find out whether BJ's Wholesale Club Holdings is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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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.