This analysis is intended to introduce important early concepts to people who are starting to invest and want to better understand how you can grow your money by investing in Walgreens Boots Alliance Inc (NASDAQ:WBA).
If you purchase a WBA share you are effectively becoming a partner with many other shareholders. As a result, your investment is being put to work to fund operations and if you want to earn an attractive return on your investment, the business needs to be making an adequate amount of money from the funds you provide. Your return is tied to WBA’s ability to do this because the amount earned is used to invest in opportunities to grow the business or payout dividends, which are the two sources of return on investment. Thus, to understand how your money can grow by investing in Walgreens Boots Alliance, you need to look at what the company returns to owners for the use of their capital, which can be done in many ways but today we will use return on capital employed (ROCE).
ROCE: Explanation and Calculation
You only have a finite amount of capital to invest, so there are only so many companies that you can add to your portfolio. Therefore all else aside, your investment in a certain company represents a vote of confidence that the money used to buy the stock will grow larger than if invested elsewhere. So the business’ ability to grow the size of your capital is very important and can be assessed by comparing the return on capital you can get on your investment with a hurdle rate that depends on the other return possibilities you can identify. We’ll look at Walgreens Boots Alliance’s returns by computing return on capital employed, which will tell us what the company can generate from the money spent in operations. Take a look at the formula box beneath:
ROCE Calculation for WBA
Return on Capital Employed (ROCE) = Earnings Before Tax (EBT) ÷ (Capital Employed)
Capital Employed = (Total Assets – Current Liabilities)
∴ ROCE = US$6.34b ÷ (US$70.15b – US$21.48b) = 13.03%
As you can see, WBA earned $13 from every $100 you invested over the previous twelve months. Comparing this to a healthy 15% benchmark shows Walgreens Boots Alliance is currently unable to return a desired amount to owners for the use of their capital, which isn’t favourable for investors who have forgone other potentially solid companies.
What is causing this?
The underperforming ROCE is not ideal for Walgreens Boots Alliance investors if the company is unable to turn things around. But if the underlying variables (earnings and capital employed) improve, WBA’s ROCE may increase, in which case your portfolio could benefit from holding the company. So it is important for investors to understand what is going on under the hood and look at how these variables have been behaving. Looking at the past 3 year period shows us that WBA boosted investor return on capital employed from 8.99%. With this, the current earnings of US$6.34b improved from US$4.89b and the amount of capital employed has declined as a result of a decline in total assets and increase in current liabilities (more borrowed money) , which is an indication that Walgreens Boots Alliance has increased the ROCE for investors by producing more earnings and using less capital.
Although Walgreens Boots Alliance’s ROCE is currently below the acceptable benchmark, the company has triggered an upward trend over the recent past which could signal an opportunity for a solid return on investment in the long term. Before making any decisions, ROCE does not tell the whole picture so you need to pay attention to other fundamentals like future prospects and valuation to determine whether there is potential for return by focusing our attention elsewhere. Walgreens Boots Alliance’s fundamentals can be explored with the links I’ve provided below if you are interested, otherwise you can start looking at other high-performing stocks.
- Future Outlook: What are well-informed industry analysts predicting for WBA’s future growth? Take a look at our free research report of analyst consensus for WBA’s outlook.
- Valuation: What is WBA worth today? Despite the unattractive ROCE, is the outlook correctly factored in to the price? The intrinsic value infographic in our free research report helps visualize whether WBA is currently undervalued by the market.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at firstname.lastname@example.org.