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If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. That's why when we briefly looked at Shoe Zone's (LON:SHOE) ROCE trend, we were very happy with what we saw.
What Is Return On Capital Employed (ROCE)?
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Shoe Zone:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.31 = UK£18m ÷ (UK£90m - UK£31m) (Based on the trailing twelve months to March 2024).
Thus, Shoe Zone has an ROCE of 31%. That's a fantastic return and not only that, it outpaces the average of 14% earned by companies in a similar industry.
View our latest analysis for Shoe Zone
Above you can see how the current ROCE for Shoe Zone compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Shoe Zone .
What The Trend Of ROCE Can Tell Us
It's hard not to be impressed by Shoe Zone's returns on capital. Over the past five years, ROCE has remained relatively flat at around 31% and the business has deployed 50% more capital into its operations. With returns that high, it's great that the business can continually reinvest its money at such appealing rates of return. You'll see this when looking at well operated businesses or favorable business models.
Our Take On Shoe Zone's ROCE
In summary, we're delighted to see that Shoe Zone has been compounding returns by reinvesting at consistently high rates of return, as these are common traits of a multi-bagger. Despite the good fundamentals, total returns from the stock have been virtually flat over the last five years. That's why we think it'd be worthwhile to look further into this stock given the fundamentals are appealing.
One final note, you should learn about the 3 warning signs we've spotted with Shoe Zone (including 1 which is significant) .
Shoe Zone is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.