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If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. In light of that, when we looked at Columbia Sportswear (NASDAQ:COLM) and its ROCE trend, we weren't exactly thrilled.
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. To calculate this metric for Columbia Sportswear, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.11 = US$256m ÷ (US$2.8b - US$475m) (Based on the trailing twelve months to March 2021).
Therefore, Columbia Sportswear has an ROCE of 11%. That's a relatively normal return on capital, and it's around the 10% generated by the Luxury industry.
Check out our latest analysis for Columbia Sportswear
In the above chart we have measured Columbia Sportswear's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Columbia Sportswear here for free.
What Does the ROCE Trend For Columbia Sportswear Tell Us?
On the surface, the trend of ROCE at Columbia Sportswear doesn't inspire confidence. Around five years ago the returns on capital were 17%, but since then they've fallen to 11%. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.
The Key Takeaway
In summary, we're somewhat concerned by Columbia Sportswear's diminishing returns on increasing amounts of capital. Yet despite these concerning fundamentals, the stock has performed strongly with a 74% return over the last five years, so investors appear very optimistic. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.
While Columbia Sportswear doesn't shine too bright in this respect, it's still worth seeing if the company is trading at attractive prices. You can find that out with our FREE intrinsic value estimation on our platform.