Koninklijke Ahold Delhaize (AMS:AD) Will Be Hoping To Turn Its Returns On Capital Around

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'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after investigating Koninklijke Ahold Delhaize (AMS:AD), we don't think it's current trends fit the mold of a multi-bagger.

Return On Capital Employed (ROCE): What is it?

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. Analysts use this formula to calculate it for Koninklijke Ahold Delhaize:

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

0.11 = €3.3b ÷ (€43b - €13b) (Based on the trailing twelve months to July 2021).

Therefore, Koninklijke Ahold Delhaize has an ROCE of 11%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Consumer Retailing industry average of 10%.

View our latest analysis for Koninklijke Ahold Delhaize

Above you can see how the current ROCE for Koninklijke Ahold Delhaize compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Koninklijke Ahold Delhaize.

What Does the ROCE Trend For Koninklijke Ahold Delhaize Tell Us?

On the surface, the trend of ROCE at Koninklijke Ahold Delhaize doesn't inspire confidence. Around five years ago the returns on capital were 15%, but since then they've fallen to 11%. However it looks like Koninklijke Ahold Delhaize might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

The Key Takeaway

In summary, Koninklijke Ahold Delhaize is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Although the market must be expecting these trends to improve because the stock has gained 59% over the last five years. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

If you'd like to know about the risks facing Koninklijke Ahold Delhaize, we've discovered 4 warning signs that you should be aware of.

While Koninklijke Ahold Delhaize 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.
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