There are a few key trends to look for if we want to identify the next multi-bagger. 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. So when we looked at Chewy (NYSE:CHWY) and its trend of ROCE, we really liked what we saw.

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Return On Capital Employed (ROCE): What Is It?

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 Chewy is:

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

0.14 = US$113m ÷ (US$3.0b - US$2.2b) (Based on the trailing twelve months to February 2025).

Thus, Chewy has an ROCE of 14%. That's a relatively normal return on capital, and it's around the 13% generated by the Specialty Retail industry.

Check out our latest analysis for Chewy

In the above chart we have measured Chewy's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Chewy .

What The Trend Of ROCE Can Tell Us

The fact that Chewy is now generating some pre-tax profits from its prior investments is very encouraging. Shareholders would no doubt be pleased with this because the business was loss-making four years ago but is is now generating 14% on its capital. In addition to that, Chewy is employing 123% more capital than previously which is expected of a company that's trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

Another thing to note, Chewy has a high ratio of current liabilities to total assets of 73%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

What We Can Learn From Chewy's ROCE

In summary, it's great to see that Chewy has managed to break into profitability and is continuing to reinvest in its business. Astute investors may have an opportunity here because the stock has declined 24% in the last five years. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

While Chewy looks impressive, no company is worth an infinite price. The intrinsic value infographic for CHWY helps visualize whether it is currently trading for a fair price.

While Chewy may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.