Greggs (LON:GRG) Knows How To Allocate Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Ergo, when we looked at the ROCE trends at Greggs (LON:GRG), we liked what we saw.

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What Is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Greggs, this is the formula:

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

0.20 = UK£201m ÷ (UK£1.3b - UK£310m) (Based on the trailing twelve months to December 2024).

So, Greggs has an ROCE of 20%. That's a fantastic return and not only that, it outpaces the average of 7.5% earned by companies in a similar industry.

See our latest analysis for Greggs

Above you can see how the current ROCE for Greggs 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 Greggs .

What Can We Tell From Greggs' ROCE Trend?

We'd be pretty happy with returns on capital like Greggs. The company has consistently earned 20% for the last five years, and the capital employed within the business has risen 75% in that time. Now considering ROCE is an attractive 20%, this combination is actually pretty appealing because it means the business can consistently put money to work and generate these high returns. You'll see this when looking at well operated businesses or favorable business models.

In Conclusion...

In summary, we're delighted to see that Greggs has been compounding returns by reinvesting at consistently high rates of return, as these are common traits of a multi-bagger. In light of this, the stock has only gained 34% over the last five years for shareholders who have owned the stock in this period. That's why it could be worth your time looking into this stock further to discover if it has more traits of a multi-bagger.

Greggs does have some risks, we noticed 3 warning signs (and 2 which are potentially serious) we think you should know about.

Greggs is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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.