Big 5 Sporting Goods (NASDAQ:BGFV) Might Have The Makings Of A Multi-Bagger

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So on that note, Big 5 Sporting Goods (NASDAQ:BGFV) looks quite promising in regards to its trends of return on capital.

Return On Capital Employed (ROCE): What Is It?

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. To calculate this metric for Big 5 Sporting Goods, this is the formula:

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

0.0093 = US$4.5m ÷ (US$674m - US$196m) (Based on the trailing twelve months to October 2023).

Therefore, Big 5 Sporting Goods has an ROCE of 0.9%. Ultimately, that's a low return and it under-performs the Specialty Retail industry average of 12%.

View our latest analysis for Big 5 Sporting Goods

In the above chart we have measured Big 5 Sporting Goods' 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 Big 5 Sporting Goods here for free.

So How Is Big 5 Sporting Goods' ROCE Trending?

While in absolute terms it isn't a high ROCE, it's promising to see that it has been moving in the right direction. Over the last five years, returns on capital employed have risen substantially to 0.9%. The amount of capital employed has increased too, by 63%. So we're very much inspired by what we're seeing at Big 5 Sporting Goods thanks to its ability to profitably reinvest capital.

What We Can Learn From Big 5 Sporting Goods' ROCE

In summary, it's great to see that Big 5 Sporting Goods 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. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. In light of that, we think it's worth looking further into this stock because if Big 5 Sporting Goods can keep these trends up, it could have a bright future ahead.

One more thing: We've identified 2 warning signs with Big 5 Sporting Goods (at least 1 which shouldn't be ignored) , and understanding them would certainly be useful.

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.