Colgate-Palmolive's (NYSE:CL) Returns On Capital Not Reflecting Well On The Business

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. So when we looked at Colgate-Palmolive (NYSE:CL), they do have a high ROCE, but we weren't exactly elated from how returns are trending.

Understanding 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 Colgate-Palmolive:

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

0.29 = US$3.4b ÷ (US$16b - US$4.6b) (Based on the trailing twelve months to June 2023).

Therefore, Colgate-Palmolive has an ROCE of 29%. In absolute terms that's a great return and it's even better than the Household Products industry average of 14%.

See our latest analysis for Colgate-Palmolive

In the above chart we have measured Colgate-Palmolive's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Colgate-Palmolive.

So How Is Colgate-Palmolive's ROCE Trending?

On the surface, the trend of ROCE at Colgate-Palmolive doesn't inspire confidence. Historically returns on capital were even higher at 45%, but they have dropped over the last five years. However it looks like Colgate-Palmolive might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

The Bottom Line On Colgate-Palmolive's ROCE

Bringing it all together, while we're somewhat encouraged by Colgate-Palmolive's reinvestment in its own business, we're aware that returns are shrinking. And investors may be recognizing these trends since the stock has only returned a total of 31% to shareholders over the last five years. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

If you'd like to know about the risks facing Colgate-Palmolive, we've discovered 3 warning signs that you should be aware of.

Colgate-Palmolive is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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.