W.W. Grainger (NYSE:GWW) Is Very Good At Capital Allocation

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. 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. Speaking of which, we noticed some great changes in W.W. Grainger's (NYSE:GWW) returns on capital, so let's have a look.

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Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on W.W. Grainger is:

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

0.41 = US$2.7b ÷ (US$8.8b - US$2.3b) (Based on the trailing twelve months to December 2024).

Therefore, W.W. Grainger has an ROCE of 41%. In absolute terms that's a great return and it's even better than the Trade Distributors industry average of 11%.

Check out our latest analysis for W.W. Grainger

Above you can see how the current ROCE for W.W. Grainger 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 analyst report for W.W. Grainger .

What Can We Tell From W.W. Grainger's ROCE Trend?

The trends we've noticed at W.W. Grainger are quite reassuring. The data shows that returns on capital have increased substantially over the last five years to 41%. The amount of capital employed has increased too, by 51%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

Our Take On W.W. Grainger's ROCE

All in all, it's terrific to see that W.W. Grainger is reaping the rewards from prior investments and is growing its capital base. Since the stock has returned a staggering 320% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it's worth looking further into this stock because if W.W. Grainger can keep these trends up, it could have a bright future ahead.

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

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.

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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.