We Like Abercrombie & Fitch's (NYSE:ANF) Returns And Here's How They're Trending

To find a multi-bagger stock, what are the underlying trends we should look for in a business? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. With that in mind, the ROCE of Abercrombie & Fitch (NYSE:ANF) looks great, so lets see what the trend can tell us.

Return On Capital Employed (ROCE): What Is It?

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. Analysts use this formula to calculate it for Abercrombie & Fitch:

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

0.29 = US$584m ÷ (US$3.0b - US$920m) (Based on the trailing twelve months to May 2024).

Thus, Abercrombie & Fitch has an ROCE of 29%. In absolute terms that's a great return and it's even better than the Specialty Retail industry average of 12%.

Check out 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're interested, you can view the analysts predictions in our free analyst report for Abercrombie & Fitch .

What Can We Tell From Abercrombie & Fitch's ROCE Trend?

Abercrombie & Fitch has not disappointed in regards to ROCE growth. The data shows that returns on capital have increased by 394% over the trailing five years. The company is now earning US$0.3 per dollar of capital employed. In regards to capital employed, Abercrombie & Fitch appears to been achieving more with less, since the business is using 24% less capital to run its operation. Abercrombie & Fitch may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. The current liabilities has increased to 31% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. 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 On Abercrombie & Fitch's ROCE

In a nutshell, we're pleased to see that Abercrombie & Fitch has been able to generate higher returns from less capital. And a remarkable 995% total return over the last five years tells us that investors are expecting more good things to come in the future. Therefore, we think it would be worth your time to check if these trends are going to continue.

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

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com