We Like These Underlying Return On Capital Trends At Chewy (NYSE:CHWY)

There are a few key trends to look for if we want to identify the next multi-bagger. 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. So when we looked at Chewy (NYSE:CHWY) and its trend of ROCE, we really liked what we saw.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Chewy is:

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

0.012 = US$12m ÷ (US$2.9b - US$2.0b) (Based on the trailing twelve months to October 2023).

So, Chewy has an ROCE of 1.2%. In absolute terms, that's a low return and it also under-performs the Specialty Retail industry average of 12%.

See our latest analysis for Chewy

In the above chart we have measured Chewy's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

How Are Returns Trending?

Chewy has recently broken into profitability so their prior investments seem to be paying off. The company was generating losses three years ago, but now it's earning 1.2% which is a sight for sore eyes. And unsurprisingly, like most companies trying to break into the black, Chewy is utilizing 212% more capital than it was three years ago. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

One more thing to note, Chewy has decreased current liabilities to 67% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance. Nevertheless, there are some potential risks the company is bearing with current liabilities that high, so just keep that in mind.

The Bottom Line

To the delight of most shareholders, Chewy has now broken into profitability. And since the stock has dived 85% over the last three years, there may be other factors affecting the company's prospects. In any case, we believe the economic trends of this company are positive and looking into the stock further could prove rewarding.

While Chewy looks impressive, no company is worth an infinite price. The intrinsic value infographic in our free research report helps visualize whether CHWY is currently trading for a fair price.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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

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.