Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. And in light of that, the trends we're seeing at Big 5 Sporting Goods' (NASDAQ:BGFV) look very promising so lets take 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. Analysts use this formula to calculate it for Big 5 Sporting Goods:

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

0.27 = US$137m ÷ (US$745m - US$240m) (Based on the trailing twelve months to October 2021).

So, Big 5 Sporting Goods has an ROCE of 27%. In absolute terms that's a great return and it's even better than the Specialty Retail industry average of 20%.

Check out our latest analysis for Big 5 Sporting Goods

Above you can see how the current ROCE for Big 5 Sporting Goods 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 Big 5 Sporting Goods here for free.

So How Is Big 5 Sporting Goods' ROCE Trending?

We like the trends that we're seeing from Big 5 Sporting Goods. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 27%. The amount of capital employed has increased too, by 101%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

The Bottom Line On Big 5 Sporting Goods' ROCE

To sum it up, Big 5 Sporting Goods has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Since the stock has returned a solid 56% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

If you want to continue researching Big 5 Sporting Goods, you might be interested to know about the 4 warning signs that our analysis has discovered.