Here's What Ross Stores' (NASDAQ:ROST) Strong Returns On Capital Mean

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. That's why when we briefly looked at Ross Stores' (NASDAQ:ROST) ROCE trend, we were very happy with what we saw.

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. Analysts use this formula to calculate it for Ross Stores:

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

0.26 = US$2.5b ÷ (US$15b - US$4.9b) (Based on the trailing twelve months to August 2024).

Thus, Ross Stores has an ROCE of 26%. In absolute terms that's a great return and it's even better than the Specialty Retail industry average of 12%.

See our latest analysis for Ross Stores

Above you can see how the current ROCE for Ross Stores compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Ross Stores .

What Does the ROCE Trend For Ross Stores Tell Us?

In terms of Ross Stores' history of ROCE, it's quite impressive. Over the past five years, ROCE has remained relatively flat at around 26% and the business has deployed 51% more capital into its operations. Returns like this are the envy of most businesses and given it has repeatedly reinvested at these rates, that's even better. If Ross Stores can keep this up, we'd be very optimistic about its future.

The Key Takeaway

In the end, the company has proven it can reinvest it's capital at high rates of returns, which you'll remember is a trait of a multi-bagger. And since the stock has risen strongly over the last five years, it appears the market might expect this trend to continue. So even though the stock might be more "expensive" than it was before, we think the strong fundamentals warrant this stock for further research.

On the other side of ROCE, we have to consider valuation. That's why we have a FREE intrinsic value estimation for ROST on our platform that is definitely worth checking out.

High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.

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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.