Capital returns show encouraging signs at Genesco (NYSE:GCO)
If you’re looking for a multi-bagger, there are a few things to watch out for. Among other things, we will want to see two things; first, growth come back on capital employed (ROCE) and on the other hand, an expansion of the amount capital employed. This shows us that it is a compounding machine, capable of continuously reinvesting its profits back into the business and generating higher returns. With this in mind, we have noticed some promising trends in Genesco (NYSE: GCO) so let’s look a little deeper.
What is return on capital employed (ROCE)?
If you’ve never worked with ROCE before, it measures the “yield” (pre-tax profit) a company generates from the capital used in its business. Analysts use this formula to calculate it for Genesco:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.13 = $135 million ÷ ($1.5 billion – $443 million) (Based on the last twelve months to July 2022).
Thereby, Genesco has a ROCE of 13%. In absolute terms, that’s a pretty standard return, but compared to the specialty retail industry average, it lags behind.
Above, you can see how Genesco’s current ROCE compares to its past returns on capital, but you can’t tell much about the past. If you’re interested, you can check out analyst forecasts in our free analyst forecast report for the company.
So, what is Genesco’s ROCE trend?
Genesco’s ROCE growth is quite impressive. Specifically, while the company has maintained relatively stable capital employed over the past five years, ROCE has climbed 46% over the same period. It is therefore likely that the company is now reaping all the benefits of its past investments, since the capital employed has not changed much. The company is doing well in this direction, and it is worth examining what the management team has planned for the long-term growth prospects.
The Key Takeaway
To put it all together, Genesco has done well to increase the returns it generates from its capital employed. And investors seem to expect more in the future, as the stock has rewarded shareholders with a 71% return over the past five years. So given that the stock has proven to have some promising trends, it’s worth researching the company further to see if those trends are likely to persist.
If you want to know the risks that Genesco faces, we have discovered 2 warning signs of which you should be aware.
If you want to look for strong companies with excellent earnings, check out this free list of companies with strong balance sheets and impressive returns on equity.
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