Why We Like The Returns At Revolve Group (NYSE:RVLV)

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, the ROCE of Revolve Group (NYSE:RVLV) looks great, so lets see what the trend can tell us.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Revolve Group is:

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

0.32 = US$113m ÷ (US$571m - US$217m) (Based on the trailing twelve months to March 2022).

So, Revolve Group has an ROCE of 32%. In absolute terms that's a great return and it's even better than the Online Retail industry average of 12%.

Check out our latest analysis for Revolve Group

Above you can see how the current ROCE for Revolve Group 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 report on analyst forecasts for the company.

The Trend Of ROCE

Investors would be pleased with what's happening at Revolve Group. The data shows that returns on capital have increased substantially over the last five years to 32%. Basically the business is earning more per dollar of capital invested and in addition to that, 712% more capital is being employed now too. So we're very much inspired by what we're seeing at Revolve Group thanks to its ability to profitably reinvest capital.

One more thing to note, Revolve Group has decreased current liabilities to 38% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. So this improvement in ROCE has come from the business' underlying economics, which is great to see.

What We Can Learn From Revolve Group's ROCE

To sum it up, Revolve Group has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Astute investors may have an opportunity here because the stock has declined 29% in the last three years. So researching this company further and determining whether or not these trends will continue seems justified.

If you want to know some of the risks facing Revolve Group we've found 2 warning signs (1 doesn't sit too well with us!) that you should be aware of before investing here.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.

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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.