Sportsman's Warehouse Holdings (NASDAQ:SPWH) Will Want To Turn Around Its Return Trends

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after investigating Sportsman's Warehouse Holdings (NASDAQ:SPWH), we don't think it's current trends fit the mold of a multi-bagger.

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. Analysts use this formula to calculate it for Sportsman's Warehouse Holdings:

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

0.0042 = US$2.4m ÷ (US$980m - US$406m) (Based on the trailing twelve months to October 2023).

Therefore, Sportsman's Warehouse Holdings has an ROCE of 0.4%. In absolute terms, that's a low return and it also under-performs the Specialty Retail industry average of 12%.

See our latest analysis for Sportsman's Warehouse Holdings

In the above chart we have measured Sportsman's Warehouse Holdings' 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 Sportsman's Warehouse Holdings here for free.

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at Sportsman's Warehouse Holdings doesn't inspire confidence. To be more specific, ROCE has fallen from 34% over the last five years. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a related note, Sportsman's Warehouse Holdings has decreased its current liabilities to 41% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money. Keep in mind 41% is still pretty high, so those risks are still somewhat prevalent.

What We Can Learn From Sportsman's Warehouse Holdings' ROCE

In summary, Sportsman's Warehouse Holdings is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Since the stock has declined 18% over the last five years, investors may not be too optimistic on this trend improving either. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

Like most companies, Sportsman's Warehouse Holdings does come with some risks, and we've found 1 warning sign that you should be aware of.

While Sportsman's Warehouse Holdings isn't earning the highest return, check out this free list of companies that are 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.