Returns Are Gaining Momentum At Genesco (NYSE:GCO)

By
Simply Wall St
Published
May 10, 2022
NYSE:GCO
Source: Shutterstock

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So when we looked at Genesco (NYSE:GCO) and its trend of ROCE, we really liked what we saw.

What is Return On Capital Employed (ROCE)?

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 Genesco is:

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

0.13 = US$147m ÷ (US$1.6b - US$432m) (Based on the trailing twelve months to January 2022).

Therefore, Genesco has an ROCE of 13%. In isolation, that's a pretty standard return but against the Specialty Retail industry average of 19%, it's not as good.

See our latest analysis for Genesco

roce
NYSE:GCO Return on Capital Employed May 10th 2022

In the above chart we have measured Genesco'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.

What The Trend Of ROCE Can Tell Us

Genesco is showing promise given that its ROCE is trending up and to the right. Looking at the data, we can see that even though capital employed in the business has remained relatively flat, the ROCE generated has risen by 50% over the last five years. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.

In Conclusion...

In summary, we're delighted to see that Genesco has been able to increase efficiencies and earn higher rates of return on the same amount of capital. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 17% to shareholders. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.

If you want to continue researching Genesco, you might be interested to know about the 1 warning sign that our analysis has discovered.

While Genesco 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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