If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Having said that, while the ROCE is currently high for Colgate-Palmolive (NYSE:CL), we aren't jumping out of our chairs because returns are decreasing.
What Is Return On Capital Employed (ROCE)?
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 Colgate-Palmolive, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.38 = US$4.3b ÷ (US$17b - US$5.6b) (Based on the trailing twelve months to September 2024).
So, Colgate-Palmolive has an ROCE of 38%. That's a fantastic return and not only that, it outpaces the average of 18% earned by companies in a similar industry.
Above you can see how the current ROCE for Colgate-Palmolive compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Colgate-Palmolive .
What Does the ROCE Trend For Colgate-Palmolive Tell Us?
Over the past five years, Colgate-Palmolive's ROCE and capital employed have both remained mostly flat. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. So it may not be a multi-bagger in the making, but given the decent 38% return on capital, it'd be difficult to find fault with the business's current operations. With fewer investment opportunities, it makes sense that Colgate-Palmolive has been paying out a decent 52% of its earnings to shareholders. Unless businesses have highly compelling growth opportunities, they'll typically return some money to shareholders.
Our Take On Colgate-Palmolive's ROCE
While Colgate-Palmolive has impressive profitability from its capital, it isn't increasing that amount of capital. Since the stock has gained an impressive 49% over the last five years, investors must think there's better things to come. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.
If you'd like to know about the risks facing Colgate-Palmolive, we've discovered 2 warning signs that you should be aware of.
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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.
