Here's What's Concerning About Grocery Outlet Holding's (NASDAQ:GO) Returns On Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. Having said that, from a first glance at Grocery Outlet Holding (NASDAQ:GO) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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. To calculate this metric for Grocery Outlet Holding, this is the formula:

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

0.044 = US$108m ÷ (US$2.8b - US$301m) (Based on the trailing twelve months to April 2023).

Therefore, Grocery Outlet Holding has an ROCE of 4.4%. In absolute terms, that's a low return and it also under-performs the Consumer Retailing industry average of 12%.

Check out 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 to see what analysts are forecasting going forward, you should check out our free report for Grocery Outlet Holding.

What Does the ROCE Trend For Grocery Outlet Holding Tell Us?

In terms of Grocery Outlet Holding's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 6.5% over the last five years. 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.

What We Can Learn From Grocery Outlet Holding's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Grocery Outlet Holding. And there could be an opportunity here if other metrics look good too, because the stock has declined 21% in the last three years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

On a separate note, we've found 1 warning sign for Grocery Outlet Holding you'll probably want to know about.

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.