There Are Reasons To Feel Uneasy About Grocery Outlet Holding's (NASDAQ:GO) Returns On Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Grocery Outlet Holding (NASDAQ:GO) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What is 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)

0.048 = US$107m ÷ (US$2.5b - US$233m) (Based on the trailing twelve months to January 2021).

Thus, Grocery Outlet Holding has an ROCE of 4.8%. In absolute terms, that's a low return and it also under-performs the Consumer Retailing industry average of 9.8%.

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 Does the ROCE Trend For Grocery Outlet Holding Tell Us?

Unfortunately, the trend isn't great with ROCE falling from 6.5% three years ago, while capital employed has grown 90%. Usually this isn't ideal, but given Grocery Outlet Holding conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. Grocery Outlet Holding probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.

The Bottom Line On 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 the stock has followed suit returning a meaningful 9.6% to shareholders over the last year. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

On a separate note, we've found 3 warning signs 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.

When trading Grocery Outlet Holding or any other investment, use the platform considered by many to be the Professional's Gateway to the Worlds Market, Interactive Brokers. You get the lowest-cost* trading on stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

This article by Simply Wall St is general in nature. 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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.