Returns Are Gaining Momentum At Chewy (NYSE:CHWY)

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So on that note, Chewy (NYSE:CHWY) looks quite promising in regards to its trends of return on capital.

Understanding Return On Capital Employed (ROCE)

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. To calculate this metric for Chewy, this is the formula:

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

0.075 = US$56m ÷ (US$2.5b - US$1.8b) (Based on the trailing twelve months to January 2023).

Therefore, Chewy has an ROCE of 7.5%. Ultimately, that's a low return and it under-performs the Specialty Retail industry average of 15%.

View our latest analysis for Chewy

Above you can see how the current ROCE for Chewy 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 Chewy here for free.

So How Is Chewy's ROCE Trending?

The fact that Chewy is now generating some pre-tax profits from its prior investments is very encouraging. The company was generating losses two years ago, but now it's earning 7.5% which is a sight for sore eyes. Not only that, but the company is utilizing 108% more capital than before, but that's to be expected from a company trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

On a side note, Chewy's current liabilities are still rather high at 70% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

What We Can Learn From Chewy's ROCE

Long story short, we're delighted to see that Chewy's reinvestment activities have paid off and the company is now profitable. Since the stock has only returned 3.3% to shareholders over the last three years, the promising fundamentals may not be recognized yet by investors. So with that in mind, we think the stock deserves further research.

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

While Chewy 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.