Slowing Rates Of Return At Grocery Outlet Holding (NASDAQ:GO) Leave Little Room For Excitement

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. However, after investigating Grocery Outlet Holding (NASDAQ:GO), we don't think it's current trends fit the mold of a multi-bagger.

Understanding Return On Capital Employed (ROCE)

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. The formula for this calculation on Grocery Outlet Holding is:

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

0.031 = US$83m ÷ (US$3.1b - US$369m) (Based on the trailing twelve months to June 2024).

Thus, Grocery Outlet Holding has an ROCE of 3.1%. In absolute terms, that's a low return and it also under-performs the Consumer Retailing industry average of 9.8%.

See 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 analyst report for Grocery Outlet Holding .

How Are Returns Trending?

The returns on capital haven't changed much for Grocery Outlet Holding in recent years. Over the past five years, ROCE has remained relatively flat at around 3.1% and the business has deployed 42% more capital into its operations. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

Our Take On Grocery Outlet Holding's ROCE

Long story short, while Grocery Outlet Holding has been reinvesting its capital, the returns that it's generating haven't increased. And in the last five years, the stock has given away 51% so the market doesn't look too hopeful on these trends strengthening any time soon. Therefore based on the analysis done in this article, we don't think Grocery Outlet Holding has the makings of a multi-bagger.

If you'd like to know about the risks facing Grocery Outlet Holding, we've discovered 1 warning sign that you should be aware of.

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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.