Shoe Zone (LON:SHOE) could become a multi-bagger


If you’re not sure where to start when looking for the next multi-bagger, there are a few key trends you should watch out for. Ideally, a business will show two trends; first growth come back on capital employed (ROCE) and on the other hand, growth amount capital employed. If you see this, it usually means it’s a company with a great business model and lots of profitable reinvestment opportunities. And in light of that, the trends we see at shoe area (LON:SHOE) looks very promising, so let’s take a look.

Return on capital employed (ROCE): what is it?

Just to clarify if you’re not sure, ROCE is a measure of the pre-tax income (as a percentage) that a business earns on the capital invested in its business. The formula for this calculation on Shoe Zone is:

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

0.32 = £19m ÷ (£93m – £36m) (Based on the last twelve months to April 2022).

Thereby, Shoe Zone posted a ROCE of 32%. In absolute terms, that’s an excellent return and even better than the specialty retail industry average of 14%.

See our latest review for Shoe Zone

AIM:SHOE Return on Capital Employed July 27, 2022

In the chart above, we measured Shoe Zone’s past ROCE against its past performance, but the future is arguably more important. If you’re interested, you can check out analyst forecasts in our free analyst forecast report for the company.

What can we say about Shoe Zone’s ROCE trend?

We love the trends we see from Shoe Zone. Figures show that over the past five years, returns generated on capital employed have increased significantly to 32%. The amount of capital employed also increased by 54%. So we’re very inspired by what we’re seeing at Shoe Zone with its ability to reinvest capital profitably.

The ROCE of our Take On Shoe Zone

A business that increases its returns on capital and can constantly reinvest in itself is a highly sought after trait, and that’s what Shoe Zone has. Investors may not yet be impressed by the favorable underlying trends, as over the past five years the stock has only returned 38% to shareholders. So exploring this stock further could uncover a good opportunity, if valuation and other metrics stack up.

Shoe Zone has some risks though, we have found 3 warning signs in our investment analysis, and 1 of them should not be ignored…

High yields are a key ingredient to strong performance, so check out our free list of stocks generating high returns on equity with strong balance sheets.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.


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