The Return Trends At Petco Health and Wellness Company (NASDAQ:WOOF) Look Promising

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So when we looked at Petco Health and Wellness Company (NASDAQ:WOOF) and its trend of ROCE, we really liked what we saw.

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

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)

0.041 = US$228m ÷ (US$6.6b - US$1.0b) (Based on the trailing twelve months to January 2023).

So, Petco Health and Wellness Company has an ROCE of 4.1%. In absolute terms, that's a low return and it also under-performs the Specialty Retail industry average of 14%.

Check out our latest analysis for Petco Health and Wellness Company

Above you can see how the current ROCE for Petco Health and Wellness Company 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 Can We Tell From Petco Health and Wellness Company's ROCE Trend?

While there are companies with higher returns on capital out there, we still find the trend at Petco Health and Wellness Company promising. 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 51% over the last three years. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.

The Bottom Line

As discussed above, Petco Health and Wellness Company appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. And since the stock has fallen 56% over the last year, there might be an opportunity here. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

Petco Health and Wellness Company does have some risks, we noticed 2 warning signs (and 1 which is concerning) we think you should know about.

While Petco Health and Wellness Company may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.