Returns On Capital At American Eagle Outfitters (NYSE:AEO) Have Hit The Brakes

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Although, when we looked at American Eagle Outfitters (NYSE:AEO), it didn't seem to tick all of these boxes.

What Is Return On Capital Employed (ROCE)?

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 American Eagle Outfitters is:

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

0.15 = US$413m ÷ (US$3.6b - US$773m) (Based on the trailing twelve months to May 2024).

So, American Eagle Outfitters has an ROCE of 15%. In absolute terms, that's a satisfactory return, but compared to the Specialty Retail industry average of 12% it's much better.

View our latest analysis for American Eagle Outfitters

In the above chart we have measured American Eagle 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 American Eagle Outfitters for free.

What The Trend Of ROCE Can Tell Us

Over the past five years, American Eagle Outfitters' ROCE and capital employed have both remained mostly flat. Businesses with these traits tend to be mature and steady operations because they're past the growth phase. With that in mind, unless investment picks up again in the future, we wouldn't expect American Eagle Outfitters to be a multi-bagger going forward.

Our Take On American Eagle Outfitters' ROCE

We can conclude that in regards to American Eagle Outfitters' returns on capital employed and the trends, there isn't much change to report on. Since the stock has gained an impressive 41% over the last five years, investors must think there's better things to come. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

If you'd like to know about the risks facing American Eagle Outfitters, we've discovered 2 warning signs that you should be aware of.

While American Eagle Outfitters 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.