Returns Are Gaining Momentum At Savers Value Village (NYSE:SVV)

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Speaking of which, we noticed some great changes in Savers Value Village's (NYSE:SVV) returns on capital, so let's have a look.

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

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. To calculate this metric for Savers Value Village, this is the formula:

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

0.064 = US$106m ÷ (US$1.9b - US$243m) (Based on the trailing twelve months to June 2024).

Therefore, Savers Value Village has an ROCE of 6.4%. Ultimately, that's a low return and it under-performs the Multiline Retail industry average of 13%.

View our latest analysis for Savers Value Village

Above you can see how the current ROCE for Savers Value Village 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 Savers Value Village for free.

The Trend Of ROCE

Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. The data shows that returns on capital have increased substantially over the last four years to 6.4%. The amount of capital employed has increased too, by 98%. So we're very much inspired by what we're seeing at Savers Value Village thanks to its ability to profitably reinvest capital.

What We Can Learn From Savers Value Village's ROCE

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Savers Value Village has. Given the stock has declined 47% in the last year, this could be a good investment if the valuation and other metrics are also appealing. So researching this company further and determining whether or not these trends will continue seems justified.

One more thing: We've identified 3 warning signs with Savers Value Village (at least 1 which is significant) , and understanding them would certainly be useful.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.