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. In light of that, when we looked at Burlington Stores (NYSE:BURL) and its ROCE trend, we weren't exactly thrilled.
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. Analysts use this formula to calculate it for Burlington Stores:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.031 = US$164m ÷ (US$7.1b - US$1.7b) (Based on the trailing twelve months to May 2021).
Therefore, Burlington Stores has an ROCE of 3.1%. Ultimately, that's a low return and it under-performs the Specialty Retail industry average of 16%.
Above you can see how the current ROCE for Burlington Stores 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 report for Burlington Stores.
How Are Returns Trending?
In terms of Burlington Stores' historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 18%, but since then they've fallen to 3.1%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.
While returns have fallen for Burlington Stores in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And the stock has done incredibly well with a 332% return over the last five years, so long term investors are no doubt ecstatic with that result. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.
If you'd like to know more about Burlington Stores, we've spotted 3 warning signs, and 1 of them makes us a bit uncomfortable.
While Burlington Stores 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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What are the risks and opportunities for Burlington Stores?
Earnings are forecast to grow 30.41% per year
Debt is not well covered by operating cash flow
High level of non-cash earnings
Significant insider selling over the past 3 months
Profit margins (1.9%) are lower than last year (4.9%)
This article by Simply Wall St is general in nature. 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.
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