Shoe Carnival (NASDAQ:SCVL) Shareholders Will Want The ROCE Trajectory To Continue

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So on that note, Shoe Carnival (NASDAQ:SCVL) looks quite promising in regards to its trends of return on capital.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Shoe Carnival, this is the formula:

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

0.19 = US$150m ÷ (US$966m - US$164m) (Based on the trailing twelve months to October 2022).

Thus, Shoe Carnival has an ROCE of 19%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Specialty Retail industry average of 18%.

Our analysis indicates that SCVL is potentially undervalued!

In the above chart we have measured Shoe Carnival's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

The Trend Of ROCE

The trends we've noticed at Shoe Carnival are quite reassuring. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 19%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 122%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

The Bottom Line On Shoe Carnival's ROCE

All in all, it's terrific to see that Shoe Carnival is reaping the rewards from prior investments and is growing its capital base. Since the stock has returned a solid 99% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

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

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.