Returns On Capital At Metcash (ASX:MTS) Have Hit The Brakes

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. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. That's why when we briefly looked at Metcash's (ASX:MTS) ROCE trend, we were pretty happy with what we saw.

Return On Capital Employed (ROCE): What Is It?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Metcash is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.18 = AU$460m ÷ (AU$5.8b - AU$3.2b) (Based on the trailing twelve months to October 2023).

Therefore, Metcash has an ROCE of 18%. On its own, that's a standard return, however it's much better than the 14% generated by the Consumer Retailing industry.

View our latest analysis for Metcash

In the above chart we have measured Metcash's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Metcash here for free.

The Trend Of ROCE

While the returns on capital are good, they haven't moved much. The company has employed 68% more capital in the last five years, and the returns on that capital have remained stable at 18%. Since 18% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.

On a side note, Metcash's current liabilities are still rather high at 56% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

What We Can Learn From Metcash's ROCE

In the end, Metcash has proven its ability to adequately reinvest capital at good rates of return. And the stock has followed suit returning a meaningful 97% to shareholders over the last five years. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.

One more thing, we've spotted 1 warning sign facing Metcash that you might find interesting.

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.

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.