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When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. So after glancing at the trends within Columbia Sportswear (NASDAQ:COLM), we weren't too hopeful.
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 Columbia Sportswear:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.12 = US$271m ÷ (US$3.0b - US$767m) (Based on the trailing twelve months to December 2024).
Thus, Columbia Sportswear has an ROCE of 12%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Luxury industry average of 13%.
See 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 to see what analysts are forecasting going forward, you should check out our free analyst report for Columbia Sportswear .
So How Is Columbia Sportswear's ROCE Trending?
In terms of Columbia Sportswear's historical ROCE movements, the trend doesn't inspire confidence. Unfortunately the returns on capital have diminished from the 17% that they were earning five years ago. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Columbia Sportswear becoming one if things continue as they have.
The Bottom Line On Columbia Sportswear's ROCE
In summary, it's unfortunate that Columbia Sportswear is generating lower returns from the same amount of capital. Despite the concerning underlying trends, the stock has actually gained 15% over the last five years, so it might be that the investors are expecting the trends to reverse. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.