There Are Reasons To Feel Uneasy About Five Below's (NASDAQ:FIVE) Returns On Capital

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. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after investigating Five Below (NASDAQ:FIVE), we don't think it's current trends fit the mold of a multi-bagger.

What Is Return On Capital Employed (ROCE)?

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. To calculate this metric for Five Below, this is the formula:

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

0.10 = US$345m ÷ (US$4.2b - US$875m) (Based on the trailing twelve months to November 2024).

Therefore, Five Below has an ROCE of 10%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Specialty Retail industry average of 13%.

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'd like, you can check out the forecasts from the analysts covering Five Below for free.

What Can We Tell From Five Below's ROCE Trend?

On the surface, the trend of ROCE at Five Below doesn't inspire confidence. Around five years ago the returns on capital were 13%, but since then they've fallen to 10%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

The Bottom Line On Five Below's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Five Below. These growth trends haven't led to growth returns though, since the stock has fallen 11% over the last five years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

Five Below could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation for FIVE on our platform quite valuable.

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.