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What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, the ROCE of Altria Group (NYSE:MO) looks great, so lets see what the trend can tell us.
Understanding Return On Capital Employed (ROCE)
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Altria Group, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.46 = US$12b ÷ (US$34b - US$8.0b) (Based on the trailing twelve months to September 2024).
Therefore, Altria Group has an ROCE of 46%. In absolute terms that's a great return and it's even better than the Tobacco industry average of 22%.
Check out our latest analysis for Altria Group
In the above chart we have measured Altria Group'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 analyst report for Altria Group .
How Are Returns Trending?
We're pretty happy with how the ROCE has been trending at Altria Group. The figures show that over the last five years, returns on capital have grown by 95%. The company is now earning US$0.5 per dollar of capital employed. Interestingly, the business may be becoming more efficient because it's applying 42% less capital than it was five years ago. If this trend continues, the business might be getting more efficient but it's shrinking in terms of total assets.
What We Can Learn From Altria Group's ROCE
From what we've seen above, Altria Group has managed to increase it's returns on capital all the while reducing it's capital base. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 59% return over the last five years. In light of that, we think it's worth looking further into this stock because if Altria Group can keep these trends up, it could have a bright future ahead.
Altria Group does have some risks, we noticed 2 warning signs (and 1 which doesn't sit too well with us) we think you should know about.