If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we looked at US Foods Holding (NYSE:USFD), it didn't seem to tick all of these boxes.
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. The formula for this calculation on US Foods Holding is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.031 = US$319m ÷ (US$13b - US$2.4b) (Based on the trailing twelve months to September 2020).
Therefore, US Foods Holding has an ROCE of 3.1%. Ultimately, that's a low return and it under-performs the Consumer Retailing industry average of 11%.
Above you can see how the current ROCE for US Foods 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.
The Trend Of ROCE
We weren't thrilled with the trend because US Foods Holding's ROCE has reduced by 34% over the last five years, while the business employed 40% more capital. Usually this isn't ideal, but given US Foods 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. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with US Foods Holding's earnings and if they change as a result from the capital raise.
The Bottom Line
Bringing it all together, while we're somewhat encouraged by US Foods Holding's reinvestment in its own business, we're aware that returns are shrinking. And with the stock having returned a mere 4.6% in the last three years to shareholders, you could argue that they're aware of these lackluster trends. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.
US Foods Holding does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those makes us a bit uncomfortable...
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
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