Columbia Sportswear (NASDAQ:COLM) is very good at capital allocation
Finding a business that has the potential to grow significantly isn’t easy, but it is possible if we look at a few key financial metrics. First, we’ll want to see proof come back on capital employed (ROCE) which is increasing, and on the other hand, a base capital employed. Simply put, these types of businesses are slot machines, meaning they continually reinvest their profits at ever-higher rates of return. And in light of that, the trends we see at Columbia Sportswear‘s (NASDAQ:COLM) look very promising, so let’s take a look.
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. To calculate this metric for Columbia Sportswear, here is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.21 = $465 million ÷ ($2.8 billion – $571 million) (Based on the last twelve months to March 2022).
So, Columbia Sportswear has a ROCE of 21%. In absolute terms, this is an excellent return and is even better than the luxury industry average of 15%.
Check out our latest analysis for Columbia Sportswear
In the graph above, we measured Columbia Sportswear’s past ROCE against its past performance, but the future is arguably more important. If you want to see what analysts are predicting for the future, you should check out our free report for Columbia Sportswear.
What is the return trend?
Investors would be thrilled with what’s happening at Columbia Sportswear. Over the past five years, return on capital employed has increased substantially to 21%. Basically, the business earns more per dollar of invested capital and on top of that, 34% more capital is also utilized now. So we’re very inspired by what we’re seeing at Columbia Sportswear with its ability to reinvest capital profitably.
Our take on Columbia Sportswear ROCE
In summary, it’s great to see that Columbia Sportswear can rack up returns by constantly reinvesting capital at increasing rates of return, as these are some of the key ingredients in these highly sought after multi-baggers. And with a respectable 46% attributed to those who held the shares over the past five years, you could say these developments are starting to get the attention they deserve. Therefore, we think it would be worth checking whether these trends will continue.
Columbia Sportswear comes with some risk, though, and we’ve spotted 1 warning sign for Columbia Sportswear that might interest you.
If you want to see other businesses earning high returns, check out our free list of companies earning high returns with strong balance sheets here.
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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.