Should You Be Impressed By Ocado Group's (LON:OCDO) Returns on Capital?

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Ocado Group (LON:OCDO), it didn't seem to tick all of these boxes.

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. Analysts use this formula to calculate it for Ocado Group:

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

0.0027 = UK£9.7m ÷ (UK£4.0b - UK£494m) (Based on the trailing twelve months to November 2020).

Thus, Ocado Group has an ROCE of 0.3%. Ultimately, that's a low return and it under-performs the Online Retail industry average of 13%.

Check out our latest analysis for Ocado Group

In the above chart we have measured Ocado Group'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 Does the ROCE Trend For Ocado Group Tell Us?

Unfortunately, the trend isn't great with ROCE falling from 5.3% five years ago, while capital employed has grown 793%. That being said, Ocado Group raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. It's unlikely that all of the funds raised have been put to work yet, so as a consequence Ocado Group might not have received a full period of earnings contribution from it.

On a related note, Ocado Group has decreased its current liabilities to 12% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

In Conclusion...

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Ocado Group. And the stock has done incredibly well with a 854% return over the last five years, so long term investors are no doubt ecstatic with that result. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

Like most companies, Ocado Group does come with some risks, and we've found 2 warning signs that you should be aware of.

While Ocado Group 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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