Returns At Woolworths Holdings (JSE:WHL) Are On The Way Up

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at Woolworths Holdings (JSE:WHL) and its trend of ROCE, we really liked what we saw.

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Understanding Return On Capital Employed (ROCE)

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 Woolworths Holdings is:

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

0.17 = R5.0b ÷ (R43b - R14b) (Based on the trailing twelve months to December 2024).

Thus, Woolworths Holdings has an ROCE of 17%. On its own, that's a standard return, however it's much better than the 7.6% generated by the Multiline Retail industry.

View our latest analysis for Woolworths Holdings

In the above chart we have measured Woolworths Holdings' 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 Woolworths Holdings for free.

What Does the ROCE Trend For Woolworths Holdings Tell Us?

Woolworths Holdings has not disappointed in regards to ROCE growth. The data shows that returns on capital have increased by 35% over the trailing five years. That's a very favorable trend because this means that the company is earning more per dollar of capital that's being employed. Speaking of capital employed, the company is actually utilizing 35% less than it was five years ago, which can be indicative of a business that's improving its efficiency. Woolworths Holdings may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.

The Bottom Line

In a nutshell, we're pleased to see that Woolworths Holdings has been able to generate higher returns from less capital. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 75% return over the last five years. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

One more thing, we've spotted 1 warning sign facing Woolworths Holdings that you might find interesting.

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.