Returns On Capital At Canadian Tire Corporation (TSE:CTC.A) Have Hit The Brakes

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after investigating Canadian Tire Corporation (TSE:CTC.A), we don't think it's current trends fit the mold of a multi-bagger.

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 Canadian Tire Corporation:

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

0.084 = CA$1.3b ÷ (CA$22b - CA$6.7b) (Based on the trailing twelve months to March 2024).

So, Canadian Tire Corporation has an ROCE of 8.4%. Ultimately, that's a low return and it under-performs the Multiline Retail industry average of 11%.

Check out our latest analysis for Canadian Tire Corporation

Above you can see how the current ROCE for Canadian Tire Corporation compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Canadian Tire Corporation .

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

Things have been pretty stable at Canadian Tire Corporation, with its capital employed and returns on that capital staying somewhat the same for the last five years. Businesses with these traits tend to be mature and steady operations because they're past the growth phase. So don't be surprised if Canadian Tire Corporation doesn't end up being a multi-bagger in a few years time. This probably explains why Canadian Tire Corporation is paying out 49% of its income to shareholders in the form of dividends. Given the business isn't reinvesting in itself, it makes sense to distribute a portion of earnings among shareholders.

The Bottom Line On Canadian Tire Corporation's ROCE

In summary, Canadian Tire Corporation isn't compounding its earnings but is generating stable returns on the same amount of capital employed. And investors may be recognizing these trends since the stock has only returned a total of 14% to shareholders over the last five years. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

On a final note, we found 4 warning signs for Canadian Tire Corporation (1 can't be ignored) 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com