Petco Health and Wellness Company (NASDAQ:WOOF) Might Have The Makings Of A Multi-Bagger

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So on that note, Petco Health and Wellness Company (NASDAQ:WOOF) looks quite promising in regards to its trends of return on capital.

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. To calculate this metric for Petco Health and Wellness Company, this is the formula:

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

0.051 = US$279m ÷ (US$6.5b - US$1.0b) (Based on the trailing twelve months to April 2022).

So, Petco Health and Wellness Company has an ROCE of 5.1%. In absolute terms, that's a low return and it also under-performs the Specialty Retail industry average of 18%.

See our latest analysis for Petco Health and Wellness Company

In the above chart we have measured Petco Health and Wellness Company'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 Petco Health and Wellness Company.

So How Is Petco Health and Wellness Company's ROCE Trending?

Petco Health and Wellness Company is showing promise given that its ROCE is trending up and to the right. Looking at the data, we can see that even though capital employed in the business has remained relatively flat, the ROCE generated has risen by 48% over the last three years. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.

The Bottom Line On Petco Health and Wellness Company's ROCE

To bring it all together, Petco Health and Wellness Company has done well to increase the returns it's generating from its capital employed. Astute investors may have an opportunity here because the stock has declined 28% in the last year. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

If you want to continue researching Petco Health and Wellness Company, you might be interested to know about the 1 warning sign that our analysis has discovered.

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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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.