There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we’d want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. If you see this, it typically means it’s a company with a great business model and plenty of profitable reinvestment opportunities. However, after briefly looking over the numbers, we don’t think NIKE (NYSE:NKE) has the makings of a multi-bagger going forward, but let’s have a look at why that may be.
Understanding Return On Capital Employed (ROCE)
If you haven’t worked with ROCE before, it measures the ‘return’ (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for NIKE:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.19 = US$5.0b ÷ (US$38b – US$11b) (Based on the trailing twelve months to February 2025).
Thus, NIKE has an ROCE of 19%. On its own, that’s a standard return, however it’s much better than the 13% generated by the Luxury industry.
Above you can see how the current ROCE for NIKE compares to its prior returns on capital, but there’s only so much you can tell from the past. If you’re interested, you can view the analysts predictions in our free analyst report for NIKE .
What Can We Tell From NIKE’s ROCE Trend?
On the surface, the trend of ROCE at NIKE doesn’t inspire confidence. Around five years ago the returns on capital were 29%, but since then they’ve fallen to 19%. Meanwhile, the business is utilizing more capital but this hasn’t moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.
In Conclusion…
Bringing it all together, while we’re somewhat encouraged by NIKE’s reinvestment in its own business, we’re aware that returns are shrinking. Since the stock has declined 34% over the last five years, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don’t think NIKE has the makings of a multi-bagger.
If you’re still interested in NIKE it’s worth checking out our FREE intrinsic value approximation for NKE to see if it’s trading at an attractive price in other respects.