Grocery Outlet Holding (NASDAQ:GO) Will Want To Turn Around Its Return Trends

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding 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. Although, when we looked at Grocery Outlet Holding (NASDAQ:GO), it didn't seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed 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)

0.036 = US$88m ÷ (US$2.7b - US$260m) (Based on the trailing twelve months to July 2022).

Thus, Grocery Outlet Holding has an ROCE of 3.6%. In absolute terms, that's a low return and it also under-performs the Consumer Retailing industry average of 9.2%.

View our latest analysis for Grocery Outlet Holding

In the above chart we have measured Grocery Outlet Holding's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Grocery Outlet Holding here for free.

The Trend Of ROCE

On the surface, the trend of ROCE at Grocery Outlet Holding doesn't inspire confidence. Over the last four years, returns on capital have decreased to 3.6% from 6.6% four years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

In Conclusion...

To conclude, we've found that Grocery Outlet Holding is reinvesting in the business, but returns have been falling. Unsurprisingly, the stock has only gained 5.7% over the last three years, which potentially indicates that investors are accounting for this going forward. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

If you want to continue researching Grocery Outlet Holding, you might be interested to know about the 2 warning signs that our analysis has discovered.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and 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.