Urban Outfitters' (NASDAQ:URBN) Returns On Capital Not Reflecting Well On The Business

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. Although, when we looked at Urban Outfitters (NASDAQ:URBN), it didn't seem to tick all of these boxes.

What Is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Urban Outfitters, this is the formula:

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

0.09 = US$258m ÷ (US$3.8b - US$928m) (Based on the trailing twelve months to April 2023).

Therefore, Urban Outfitters has an ROCE of 9.0%. In absolute terms, that's a low return and it also under-performs the Specialty Retail industry average of 14%.

Check out our latest analysis for Urban Outfitters

In the above chart we have measured Urban Outfitters' 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 Urban Outfitters here for free.

SWOT Analysis for Urban Outfitters

The Trend Of ROCE

On the surface, the trend of ROCE at Urban Outfitters doesn't inspire confidence. Over the last five years, returns on capital have decreased to 9.0% from 19% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

In Conclusion...

To conclude, we've found that Urban Outfitters is reinvesting in the business, but returns have been falling. And investors appear hesitant that the trends will pick up because the stock has fallen 30% in the last five years. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

If you want to continue researching Urban Outfitters, you might be interested to know about the 2 warning signs that our analysis has discovered.

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.