Slowing Rates Of Return At On Holding (NYSE:ONON) Leave Little Room For Excitement
What are the early trends we should look for to identify a stock that could multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. In light of that, when we looked at On Holding (NYSE:ONON) and its ROCE trend, we weren't exactly thrilled.
Understanding Return On Capital Employed (ROCE)
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on On Holding is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.075 = CHF85m ÷ (CHF1.4b - CHF243m) (Based on the trailing twelve months to December 2022).
Therefore, On Holding has an ROCE of 7.5%. Ultimately, that's a low return and it under-performs the Luxury industry average of 16%.
Check out our latest analysis for On Holding
Above you can see how the current ROCE for On Holding compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for On Holding.
What The Trend Of ROCE Can Tell Us
There are better returns on capital out there than what we're seeing at On Holding. Over the past three years, ROCE has remained relatively flat at around 7.5% and the business has deployed 1,355% more capital into its operations. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.
On a side note, On Holding has done well to reduce current liabilities to 18% of total assets over the last three years. Effectively suppliers now fund less of the business, which can lower some elements of risk.
The Bottom Line On On Holding's ROCE
Long story short, while On Holding has been reinvesting its capital, the returns that it's generating haven't increased. Although the market must be expecting these trends to improve because the stock has gained 28% over the last year. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.
One final note, you should learn about the 2 warning signs we've spotted with On Holding (including 1 which is a bit unpleasant) .
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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