There's Been No Shortage Of Growth Recently For Kraft Heinz's (NASDAQ:KHC) Returns On Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. So when we looked at Kraft Heinz (NASDAQ:KHC) and its trend of ROCE, we really liked what we saw.

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. The formula for this calculation on Kraft Heinz is:

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

0.068 = US$5.5b ÷ (US$90b - US$7.8b) (Based on the trailing twelve months to September 2023).

Thus, Kraft Heinz has an ROCE of 6.8%. In absolute terms, that's a low return and it also under-performs the Food industry average of 10%.

See our latest analysis for Kraft Heinz

Above you can see how the current ROCE for Kraft Heinz 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 Kraft Heinz Tell Us?

We're pretty happy with how the ROCE has been trending at Kraft Heinz. The data shows that returns on capital have increased by 21% over the trailing five years. The company is now earning US$0.07 per dollar of capital employed. In regards to capital employed, Kraft Heinz appears to been achieving more with less, since the business is using 27% less capital to run its operation. If this trend continues, the business might be getting more efficient but it's shrinking in terms of total assets.

What We Can Learn From Kraft Heinz's ROCE

In the end, Kraft Heinz has proven it's capital allocation skills are good with those higher returns from less amount of capital. Since the total return from the stock has been almost flat over the last five years, there might be an opportunity here if the valuation looks good. With that in mind, we believe the promising trends warrant this stock for further investigation.

If you want to continue researching Kraft Heinz, you might be interested to know about the 1 warning sign that our analysis has discovered.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.