What are the early trends we should look for to identify a stock that could multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. 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 the ROCE trend of Altria Group (NYSE:MO) we really liked what we saw.
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. To calculate this metric for Altria Group, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.45 = US$12b ÷ (US$34b - US$7.8b) (Based on the trailing twelve months to June 2024).
Thus, Altria Group has an ROCE of 45%. In absolute terms that's a great return and it's even better than the Tobacco industry average of 18%.
Above you can see how the current ROCE for Altria Group 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 analyst report for Altria Group .
How Are Returns Trending?
We're pretty happy with how the ROCE has been trending at Altria Group. The figures show that over the last five years, returns on capital have grown by 118%. The company is now earning US$0.4 per dollar of capital employed. In regards to capital employed, Altria Group appears to been achieving more with less, since the business is using 46% less capital to run its operation. Altria Group may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.
The Bottom Line On Altria Group's ROCE
In a nutshell, we're pleased to see that Altria Group has been able to generate higher returns from less capital. Since the stock has returned a solid 69% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.
Altria Group does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those can't be ignored...
If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets 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.
