Etsys Stock Is On Fire But Is The Growth Sustainable

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'll want to identify a growth trend, ideally driven by capacity to reinvest capital at ever-increasing rates of return on capital. To put it simply, a business needs to be able to invest its shareholders' funds at consistently high rates of return in order to generate growth. So, when we looked at Etsy (NASDAQ:ETSY) and saw that ROCE was trending upwards, we got a little excited.

For those that don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Etsy: Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities). What this means is that a company can generate returns merely by growing, without needing to fund new capital by borrowing or issuing equity.

Looking at the last year of data, Etsy posted an ROCE of 23%. That's a relatively high ROCE, and it would provide comfort that the company is capable of efficiently generating profits from the capital at its disposal. Etsy's ROCE is also increasing, which is also pleasing to see. The trends we've looked at are quite short term, so it's great to see that the stock's underlying fundamentals are strong as well.

Next, we compared Etsy's performance to the industry as a whole, and it seems the company is below the industry when it comes to ROCE, coming in at 23% against the industry average. However, we'd need to look deeper to establish if this is due to the environment or something within the business itself.

While the MOQ (Minimum Order Quantity) may vary, Etsy's position is solidified by its growth, with the possibility of sustainable rates into the future. With returns on capital of this level, it's hard to argue that Etsy isn't doing a good job. For now, we think the company's metric holds plenty of promise, and we're optimistic about what this could mean for returns in the long run.

To sum it up, we should look for trends - who's getting better, and who's getting worse, when it comes to ROCE growth. Then we'll have companies like Etsy that are great examples of the growth trends one should look for in a business. More information on this would enable informed investment decisions and help keep an investor on the path to financial freedom.