Altria Group (NYSE:MO) Is Achieving High Returns On Its Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Speaking of which, we noticed some great changes in Altria Group's (NYSE:MO) returns on capital, so let's have a look.

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 Altria Group is:

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

0.43 = US$12b ÷ (US$37b - US$8.6b) (Based on the trailing twelve months to December 2022).

Therefore, Altria Group has an ROCE of 43%. In absolute terms that's a great return and it's even better than the Tobacco industry average of 19%.

View our latest analysis for Altria Group

In the above chart we have measured Altria Group's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Altria Group here for free.

The Trend Of ROCE

You'd find it hard not to be impressed with the ROCE trend at Altria Group. The data shows that returns on capital have increased by 57% over the trailing five years. The company is now earning US$0.4 per dollar of capital employed. In regards to capital employed, Altria Group appears to been achieving more with less, since the business is using 22% less capital to run its operation. A business that's shrinking its asset base like this isn't usually typical of a soon to be multi-bagger company.

What We Can Learn From Altria Group's ROCE

In the end, Altria Group has proven it's capital allocation skills are good with those higher returns from less amount of capital. Since the stock has only returned 2.2% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.

If you want to continue researching Altria Group, you might be interested to know about the 2 warning signs that our analysis has discovered.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high 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.