Has Urban Outfitters (NASDAQ:URBN) Got What It Takes To Become A Multi-Bagger?

There are a few key trends to look for if we want to identify the next multi-bagger. 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. In light of that, when we looked at Urban Outfitters (NASDAQ:URBN) and its ROCE trend, we weren't exactly thrilled.

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. The formula for this calculation on Urban Outfitters is:

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

0.027 = US$69m ÷ (US$3.5b - US$947m) (Based on the trailing twelve months to October 2020).

So, Urban Outfitters has an ROCE of 2.7%. Ultimately, that's a low return and it under-performs the Specialty Retail industry average of 12%.

View our latest analysis for Urban Outfitters

Above you can see how the current ROCE for Urban Outfitters 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 report for Urban Outfitters.

The Trend Of ROCE

When we looked at the ROCE trend at Urban Outfitters, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 2.7% from 24% five years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

The Key Takeaway

We're a bit apprehensive about Urban Outfitters because despite more capital being deployed in the business, returns on that capital and sales have both fallen. In spite of that, the stock has delivered a 19% return to shareholders who held over the last five years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

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

While Urban Outfitters may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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