What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. With that in mind, we've noticed some promising trends at Loblaw Companies (TSE:L) so let's look a bit deeper.
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 Loblaw Companies, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.11 = CA$3.2b ÷ (CA$38b - CA$9.7b) (Based on the trailing twelve months to October 2022).
So, Loblaw Companies has an ROCE of 11%. That's a pretty standard return and it's in line with the industry average of 11%.
See our latest analysis for Loblaw Companies
In the above chart we have measured Loblaw Companies' 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 report for Loblaw Companies.
What Does the ROCE Trend For Loblaw Companies Tell Us?
Loblaw Companies' ROCE growth is quite impressive. The figures show that over the last five years, ROCE has grown 27% whilst employing roughly the same amount of capital. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.
Our Take On Loblaw Companies' ROCE
To bring it all together, Loblaw Companies has done well to increase the returns it's generating from its capital employed. Since the stock has returned a staggering 140% 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 Loblaw Companies can keep these trends up, it could have a bright future ahead.
Loblaw Companies does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those makes us a bit uncomfortable...
While Loblaw Companies isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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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.
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