If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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 on that note, Urban Outfitters (NASDAQ:URBN) looks quite promising in regards to its trends of return on capital.

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

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 Urban Outfitters:

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

0.14 = US$478m ÷ (US$4.5b - US$1.1b) (Based on the trailing twelve months to January 2025).

Therefore, Urban Outfitters 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.

View our latest analysis for Urban Outfitters

In the above chart we have measured Urban Outfitters' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Urban Outfitters .

How Are Returns Trending?

We like the trends that we're seeing from Urban Outfitters. The data shows that returns on capital have increased substantially over the last five years to 14%. The amount of capital employed has increased too, by 29%. So we're very much inspired by what we're seeing at Urban Outfitters thanks to its ability to profitably reinvest capital.

The Bottom Line On Urban Outfitters' ROCE

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Urban Outfitters has. Since the stock has returned a staggering 226% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it's worth looking further into this stock because if Urban Outfitters can keep these trends up, it could have a bright future ahead.

Like most companies, Urban Outfitters does come with some risks, and we've found 1 warning sign that you should be aware of.

While Urban Outfitters 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.