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If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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 Amer Sports' (NYSE:AS) 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. To calculate this metric for Amer Sports, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.066 = US$473m ÷ (US$8.7b - US$1.5b) (Based on the trailing twelve months to December 2024).
Therefore, Amer Sports has an ROCE of 6.6%. Ultimately, that's a low return and it under-performs the Luxury industry average of 13%.
See our latest analysis for Amer Sports
Above you can see how the current ROCE for Amer Sports 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 Amer Sports for free.
So How Is Amer Sports' ROCE Trending?
Amer Sports' ROCE growth is quite impressive. The figures show that over the last three years, ROCE has grown 147% whilst employing roughly the same amount of capital. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.
In Conclusion...
As discussed above, Amer Sports appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 80% return over the last year. In light of that, we think it's worth looking further into this stock because if Amer Sports can keep these trends up, it could have a bright future ahead.
On the other side of ROCE, we have to consider valuation. That's why we have a FREE intrinsic value estimation for AS on our platform that is definitely worth checking out.