Williams-Sonoma (NYSE:WSM) Is Investing Its Capital With Increasing Efficiency

By
Simply Wall St
Published
July 06, 2021
NYSE:WSM
Source: Shutterstock

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at the ROCE trend of Williams-Sonoma (NYSE:WSM) we really liked what we saw.

Understanding Return On Capital Employed (ROCE)

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. The formula for this calculation on Williams-Sonoma is:

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

0.44 = US$1.1b ÷ (US$4.1b - US$1.5b) (Based on the trailing twelve months to May 2021).

So, Williams-Sonoma has an ROCE of 44%. In absolute terms that's a great return and it's even better than the Specialty Retail industry average of 15%.

View our latest analysis for Williams-Sonoma

roce
NYSE:WSM Return on Capital Employed July 6th 2021

In the above chart we have measured Williams-Sonoma'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

We like the trends that we're seeing from Williams-Sonoma. The data shows that returns on capital have increased substantially over the last five years to 44%. The amount of capital employed has increased too, by 83%. So we're very much inspired by what we're seeing at Williams-Sonoma thanks to its ability to profitably reinvest capital.

In Conclusion...

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 Williams-Sonoma has. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. Therefore, we think it would be worth your time to check if these trends are going to continue.

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

High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.

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This article by Simply Wall St is general in nature. 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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