Canadian Tire Corporation (TSE:CTC.A) Has Some Way To Go To Become A Multi-Bagger

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. So, when we ran our eye over Canadian Tire Corporation's (TSE:CTC.A) trend of ROCE, we liked what we saw.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Canadian Tire Corporation is:

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

0.13 = CA$1.8b ÷ (CA$22b - CA$7.7b) (Based on the trailing twelve months to July 2023).

Thus, Canadian Tire Corporation has an ROCE of 13%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Multiline Retail industry average of 12%.

See our latest analysis for Canadian Tire Corporation

In the above chart we have measured Canadian Tire Corporation's 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.

What Can We Tell From Canadian Tire Corporation's ROCE Trend?

While the current returns on capital are decent, they haven't changed much. Over the past five years, ROCE has remained relatively flat at around 13% and the business has deployed 32% more capital into its operations. 13% is a pretty standard return, and it provides some comfort knowing that Canadian Tire Corporation has consistently earned this amount. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.

The Bottom Line On Canadian Tire Corporation's ROCE

The main thing to remember is that Canadian Tire Corporation has proven its ability to continually reinvest at respectable rates of return. However, over the last five years, the stock has only delivered a 11% return to shareholders who held over that period. So to determine if Canadian Tire Corporation is a multi-bagger going forward, we'd suggest digging deeper into the company's other fundamentals.

On a final note, we found 2 warning signs for Canadian Tire Corporation (1 doesn't sit too well with us) you should be aware of.

While Canadian Tire Corporation 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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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.