What are the early trends we should look for to identify a stock that could multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after investigating Grocery Outlet Holding (NASDAQ:GO), we don't think it's current trends fit the mold of a multi-bagger.
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 Grocery Outlet Holding is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.031 = US$83m ÷ (US$3.1b - US$369m) (Based on the trailing twelve months to June 2024).
Therefore, Grocery Outlet Holding has an ROCE of 3.1%. In absolute terms, that's a low return and it also under-performs the Consumer Retailing industry average of 9.4%.
Above you can see how the current ROCE for Grocery Outlet Holding compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Grocery Outlet Holding for free.
What The Trend Of ROCE Can Tell Us
There are better returns on capital out there than what we're seeing at Grocery Outlet Holding. The company has employed 42% more capital in the last five years, and the returns on that capital have remained stable at 3.1%. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.
The Bottom Line On Grocery Outlet Holding's ROCE
As we've seen above, Grocery Outlet Holding's returns on capital haven't increased but it is reinvesting in the business. And in the last five years, the stock has given away 56% so the market doesn't look too hopeful on these trends strengthening any time soon. Therefore based on the analysis done in this article, we don't think Grocery Outlet Holding has the makings of a multi-bagger.
Grocery Outlet Holding does have some risks though, and we've spotted 1 warning sign for Grocery Outlet Holding that you might be interested in.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
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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.
