Slowing Rates Of Return At Five Below (NASDAQ:FIVE) Leave Little Room For Excitement

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. 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. With that in mind, the ROCE of Five Below (NASDAQ:FIVE) looks decent, right now, so lets see what the trend of returns can tell us.

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

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. The formula for this calculation on Five Below is:

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

0.12 = US$379m ÷ (US$3.9b - US$742m) (Based on the trailing twelve months to May 2024).

So, Five Below has an ROCE of 12%. That's a pretty standard return and it's in line with the industry average of 12%.

Check out our latest analysis for Five Below

Above you can see how the current ROCE for Five Below 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 analyst report for Five Below .

The Trend Of ROCE

The trend of ROCE doesn't stand out much, but returns on a whole are decent. The company has employed 152% more capital in the last five years, and the returns on that capital have remained stable at 12%. Since 12% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.

Our Take On Five Below's ROCE

In the end, Five Below has proven its ability to adequately reinvest capital at good rates of return. However, despite the favorable fundamentals, the stock has fallen 36% over the last five years, so there might be an opportunity here for astute investors. That's why we think it'd be worthwhile to look further into this stock given the fundamentals are appealing.

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

While Five Below 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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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.