Investors Should Be Encouraged By Abercrombie & Fitch's (NYSE:ANF) Returns On Capital

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at the ROCE trend of Abercrombie & Fitch (NYSE:ANF) we really 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. Analysts use this formula to calculate it for Abercrombie & Fitch:

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

0.34 = US$671m ÷ (US$3.0b - US$1.1b) (Based on the trailing twelve months to August 2024).

Thus, Abercrombie & Fitch has an ROCE of 34%. In absolute terms that's a great return and it's even better than the Specialty Retail industry average of 12%.

See our latest analysis for Abercrombie & Fitch

Above you can see how the current ROCE for Abercrombie & Fitch 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 analyst report for Abercrombie & Fitch .

So How Is Abercrombie & Fitch's ROCE Trending?

You'd find it hard not to be impressed with the ROCE trend at Abercrombie & Fitch. The figures show that over the last five years, returns on capital have grown by 483%. That's a very favorable trend because this means that the company is earning more per dollar of capital that's being employed. Interestingly, the business may be becoming more efficient because it's applying 24% less capital than it was five years ago. A business that's shrinking its asset base like this isn't usually typical of a soon to be multi-bagger company.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Essentially the business now has suppliers or short-term creditors funding about 34% of its operations, which isn't ideal. It's worth keeping an eye on this because as the percentage of current liabilities to total assets increases, some aspects of risk also increase.

The Bottom Line

From what we've seen above, Abercrombie & Fitch has managed to increase it's returns on capital all the while reducing it's capital base. And a remarkable 844% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if Abercrombie & Fitch can keep these trends up, it could have a bright future ahead.

One more thing to note, we've identified 1 warning sign with Abercrombie & Fitch and understanding it should be part of your investment process.

High returns are a key ingredient to strong performance, so check out our free list ofstocks 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.