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. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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. Having said that, from a first glance at Wm Morrison Supermarkets (LON:MRW) 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 Wm Morrison Supermarkets, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.038 = UK£306m ÷ (UK£11b - UK£3.0b) (Based on the trailing twelve months to January 2021).
Therefore, Wm Morrison Supermarkets has an ROCE of 3.8%. Ultimately, that's a low return and it under-performs the Consumer Retailing industry average of 14%.
In the above chart we have measured Wm Morrison Supermarkets' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Wm Morrison Supermarkets.
So How Is Wm Morrison Supermarkets' ROCE Trending?
In terms of Wm Morrison Supermarkets' historical ROCE trend, it doesn't exactly demand attention. The company has consistently earned 3.8% for the last five years, and the capital employed within the business has risen 23% in that time. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.
In conclusion, Wm Morrison Supermarkets has been investing more capital into the business, but returns on that capital haven't increased. Unsurprisingly, the stock has only gained 19% over the last five years, which potentially indicates that investors are accounting for this going forward. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.
Wm Morrison Supermarkets does have some risks, we noticed 3 warning signs (and 1 which shouldn't be ignored) we think you should know about.
While Wm Morrison Supermarkets 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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