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

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. In light of that, when we looked at Grocery Outlet Holding (NASDAQ:GO) and its ROCE trend, we weren't exactly thrilled.

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. 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)

0.035 = US$86m ÷ (US$2.8b - US$287m) (Based on the trailing twelve months to October 2022).

So, Grocery Outlet Holding has an ROCE of 3.5%. Ultimately, that's a low return and it under-performs the Consumer Retailing industry average of 9.6%.

Check out 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'd like, you can check out the forecasts from the analysts covering Grocery Outlet Holding here for free.

The Trend Of ROCE

When we looked at the ROCE trend at Grocery Outlet Holding, we didn't gain much confidence. To be more specific, ROCE has fallen from 6.7% over the last four years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

The Bottom Line On Grocery Outlet Holding's ROCE

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. These growth trends haven't led to growth returns though, since the stock has fallen 11% over the last three years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

Like most companies, Grocery Outlet Holding does come with some risks, and we've found 1 warning sign that you should be aware of.

While Grocery Outlet Holding isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.