Tractor Supply (NASDAQ:TSCO) Is Reinvesting At Lower Rates Of Return

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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 Tractor Supply (NASDAQ:TSCO), they do have a high ROCE, but we weren't exactly elated from how returns are trending.

Return On Capital Employed (ROCE): What Is It?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Tractor Supply is:

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

0.23 = US$1.4b ÷ (US$8.5b - US$2.4b) (Based on the trailing twelve months to December 2022).

So, Tractor Supply has an ROCE of 23%. In absolute terms that's a great return and it's even better than the Specialty Retail industry average of 15%.

Check out our latest analysis for Tractor Supply

Above you can see how the current ROCE for Tractor Supply compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Tractor Supply here for free.

How Are Returns Trending?

On the surface, the trend of ROCE at Tractor Supply doesn't inspire confidence. While it's comforting that the ROCE is high, five years ago it was 34%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

The Bottom Line On Tractor Supply's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Tractor Supply. And long term investors must be optimistic going forward because the stock has returned a huge 308% to shareholders in the last five years. So should these growth trends continue, we'd be optimistic on the stock going forward.

If you want to continue researching Tractor Supply, 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.