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If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Having said that, while the ROCE is currently high for Colgate-Palmolive (NYSE:CL), we aren't jumping out of our chairs because returns are decreasing.
What Is 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. Analysts use this formula to calculate it for Colgate-Palmolive:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.29 = US$3.4b ÷ (US$16b - US$4.6b) (Based on the trailing twelve months to June 2023).
Therefore, Colgate-Palmolive has an ROCE of 29%. In absolute terms that's a great return and it's even better than the Household Products industry average of 15%.
View our latest analysis for Colgate-Palmolive
Above you can see how the current ROCE for Colgate-Palmolive 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 Colgate-Palmolive here for free.
The Trend Of ROCE
In terms of Colgate-Palmolive's historical ROCE movements, the trend isn't fantastic. Historically returns on capital were even higher at 45%, but they have dropped over the last five years. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.
Our Take On Colgate-Palmolive's ROCE
Bringing it all together, while we're somewhat encouraged by Colgate-Palmolive's reinvestment in its own business, we're aware that returns are shrinking. And with the stock having returned a mere 22% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.
One more thing to note, we've identified 3 warning signs with Colgate-Palmolive and understanding these should be part of your investment process.