If you're looking for a multi-bagger, there's a few things to keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at Loblaw Companies (TSE:L) and its trend of ROCE, we really liked what we saw.
Understanding 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. Analysts use this formula to calculate it for Loblaw Companies:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.091 = CA$2.5b ÷ (CA$35b - CA$8.2b) (Based on the trailing twelve months to March 2021).
So, Loblaw Companies has an ROCE of 9.1%. On its own, that's a low figure but it's around the 11% average generated by the Consumer Retailing industry.
Above you can see how the current ROCE for Loblaw Companies 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 Loblaw Companies here for free.
How Are Returns Trending?
Loblaw Companies has not disappointed with their ROCE growth. Looking at the data, we can see that even though capital employed in the business has remained relatively flat, the ROCE generated has risen by 29% over the last five years. So it's likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn't changed considerably. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.
What We Can Learn From Loblaw Companies' ROCE
In summary, we're delighted to see that Loblaw Companies has been able to increase efficiencies and earn higher rates of return on the same amount of capital. Considering the stock has delivered 40% to its stockholders over the last five years, it may be fair to think that investors aren't fully aware of the promising trends yet. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.
One more thing, we've spotted 1 warning sign facing Loblaw Companies that you might find interesting.
While Loblaw Companies may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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Loblaw Companies Limited, a food and pharmacy company, engages in the grocery, pharmacy, health and beauty, apparel, general merchandise, financial services, and wireless mobile products and services businesses in Canada.
Solid track record with adequate balance sheet and pays a dividend.