Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, 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. Speaking of which, we noticed some great changes in Tilly's' (NYSE:TLYS) returns on capital, so let's have a look.
Return On Capital Employed (ROCE): What is it?
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Tilly's:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.16 = US$59m ÷ (US$535m - US$167m) (Based on the trailing twelve months to July 2021).
Therefore, Tilly's has an ROCE of 16%. That's a relatively normal return on capital, and it's around the 18% generated by the Specialty Retail industry.
Above you can see how the current ROCE for Tilly's 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 Tilly's here for free.
The Trend Of ROCE
We like the trends that we're seeing from Tilly's. Over the last five years, returns on capital employed have risen substantially to 16%. The amount of capital employed has increased too, by 74%. So we're very much inspired by what we're seeing at Tilly's thanks to its ability to profitably reinvest capital.
In summary, it's great to see that Tilly's can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. And a remarkable 141% total return over the last five years tells us that investors are expecting more good things to come in the future. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.
On a final note, we found 2 warning signs for Tilly's (1 can't be ignored) you should be aware of.
While Tilly's 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.
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