Returns On Capital Are Showing Encouraging Signs At Core & Main (NYSE:CNM)

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. Speaking of which, we noticed some great changes in Core & Main's (NYSE:CNM) returns on capital, so let's have a look.

Understanding 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. The formula for this calculation on Core & Main is:

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

0.18 = US$767m ÷ (US$5.2b - US$987m) (Based on the trailing twelve months to October 2022).

So, Core & Main has an ROCE of 18%. That's a relatively normal return on capital, and it's around the 16% generated by the Trade Distributors industry.

See our latest analysis for Core & Main

In the above chart we have measured Core & Main'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.

So How Is Core & Main's ROCE Trending?

The trends we've noticed at Core & Main are quite reassuring. The data shows that returns on capital have increased substantially over the last two years to 18%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 30%. So we're very much inspired by what we're seeing at Core & Main thanks to its ability to profitably reinvest capital.

The Bottom Line On Core & Main's ROCE

All in all, it's terrific to see that Core & Main is reaping the rewards from prior investments and is growing its capital base. Astute investors may have an opportunity here because the stock has declined 12% in the last year. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

One more thing to note, we've identified 1 warning sign with Core & Main and understanding it should be part of your investment process.

While Core & Main 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.