Trends At Sportsman's Warehouse Holdings (NASDAQ:SPWH) Point To A Promising Future

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. Ergo, when we looked at the ROCE trends at Sportsman's Warehouse Holdings (NASDAQ:SPWH), we liked what we saw.

Return On Capital Employed (ROCE): What is it?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Sportsman's Warehouse Holdings is:

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

0.25 = US$103m ÷ (US$697m - US$283m) (Based on the trailing twelve months to October 2020).

Therefore, Sportsman's Warehouse Holdings has an ROCE of 25%. In absolute terms that's a great return and it's even better than the Specialty Retail industry average of 13%.

View our latest analysis for Sportsman's Warehouse Holdings

Above you can see how the current ROCE for Sportsman's Warehouse Holdings 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 Sportsman's Warehouse Holdings here for free.

So How Is Sportsman's Warehouse Holdings' ROCE Trending?

We'd be pretty happy with returns on capital like Sportsman's Warehouse Holdings. The company has employed 142% more capital in the last five years, and the returns on that capital have remained stable at 25%. Returns like this are the envy of most businesses and given it has repeatedly reinvested at these rates, that's even better. If Sportsman's Warehouse Holdings can keep this up, we'd be very optimistic about its future.

On a side note, Sportsman's Warehouse Holdings' current liabilities are still rather high at 41% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

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

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 while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.

Sportsman's Warehouse Holdings does have some risks, we noticed 2 warning signs (and 1 which is a bit unpleasant) we think you should know about.

Sportsman's Warehouse Holdings is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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