There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Having said that, from a first glance at Loblaw Companies (TSE:L) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
What is Return On Capital Employed (ROCE)?
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. 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)
0.084 = CA$2.3b ÷ (CA$36b - CA$8.7b) (Based on the trailing twelve months to October 2020).
Therefore, Loblaw Companies has an ROCE of 8.4%. In absolute terms, that's a low return and it also under-performs the Consumer Retailing industry average of 11%.
In the above chart we have measured Loblaw Companies' prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
The Trend Of ROCE
There hasn't been much to report for Loblaw Companies' returns and its level of capital employed because both metrics have been steady for the past five years. This tells us the company isn't reinvesting in itself, so it's plausible that it's past the growth phase. So unless we see a substantial change at Loblaw Companies in terms of ROCE and additional investments being made, we wouldn't hold our breath on it being a multi-bagger.
Our Take On Loblaw Companies' ROCE
In a nutshell, Loblaw Companies has been trudging along with the same returns from the same amount of capital over the last five years. And with the stock having returned a mere 30% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.
Like most companies, Loblaw Companies does come with some risks, and we've found 2 warning signs that you should be aware of.
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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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.