Capital Allocation Trends At Grocery Outlet Holding (NASDAQ:GO) Aren't Ideal

What trends should we look for it we want to identify stocks that can 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Although, when we looked at Grocery Outlet Holding (NASDAQ:GO), it didn't seem to tick all of these boxes.

Return On Capital Employed (ROCE): What Is It?

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 Grocery Outlet Holding:

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

0.047 = US$118m ÷ (US$2.8b - US$321m) (Based on the trailing twelve months to July 2023).

Therefore, Grocery Outlet Holding has an ROCE of 4.7%. Ultimately, that's a low return and it under-performs the Consumer Retailing industry average of 10%.

View our latest analysis for Grocery Outlet Holding

Above you can see how the current ROCE for Grocery Outlet Holding 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 report on analyst forecasts for the company.

What Can We Tell From Grocery Outlet Holding's ROCE Trend?

On the surface, the trend of ROCE at Grocery Outlet Holding doesn't inspire confidence. Around five years ago the returns on capital were 6.6%, but since then they've fallen to 4.7%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

The Key Takeaway

While returns have fallen for Grocery Outlet Holding in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And there could be an opportunity here if other metrics look good too, because the stock has declined 21% in the last three years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

While Grocery Outlet Holding doesn't shine too bright in this respect, it's still worth seeing if the company is trading at attractive prices. You can find that out with our FREE intrinsic value estimation on our platform.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.