American Eagle Outfitters (NYSE:AEO) Is Reinvesting At Lower Rates Of Return

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. Although, when we looked at American Eagle Outfitters (NYSE:AEO), it didn't seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

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 American Eagle Outfitters, this is the formula:

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

0.12 = US$327m ÷ (US$3.4b - US$762m) (Based on the trailing twelve months to July 2023).

Therefore, American Eagle Outfitters has an ROCE of 12%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Specialty Retail industry average of 13%.

Check out our latest analysis for American Eagle Outfitters

Above you can see how the current ROCE for American Eagle Outfitters 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 American Eagle Outfitters here for free.

What Can We Tell From American Eagle Outfitters' ROCE Trend?

On the surface, the trend of ROCE at American Eagle Outfitters doesn't inspire confidence. Over the last five years, returns on capital have decreased to 12% from 27% five years ago. 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 may take some time before the company starts to see any change in earnings from these investments.

Our Take On American Eagle Outfitters' ROCE

To conclude, we've found that American Eagle 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 15% 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.

Like most companies, American Eagle Outfitters does come with some risks, and we've found 2 warning signs that you should be aware of.

While American Eagle 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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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.