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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. 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at Grocery Outlet Holding (NASDAQ:GO), it didn't seem to tick all of these boxes.
Understanding Return On Capital Employed (ROCE)
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Grocery Outlet Holding is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.036 = US$88m ÷ (US$2.7b - US$260m) (Based on the trailing twelve months to July 2022).
Therefore, Grocery Outlet Holding has an ROCE of 3.6%. In absolute terms, that's a low return and it also under-performs the Consumer Retailing industry average of 9.2%.
Check out our latest analysis for Grocery Outlet Holding
Above you can see how the current ROCE for Grocery Outlet Holding compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Grocery Outlet Holding.
What Does the ROCE Trend For Grocery Outlet Holding Tell Us?
On the surface, the trend of ROCE at Grocery Outlet Holding doesn't inspire confidence. To be more specific, ROCE has fallen from 6.6% over the last four 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 may take some time before the company starts to see any change in earnings from these investments.
Our Take On Grocery Outlet Holding's ROCE
In summary, Grocery Outlet Holding is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And investors may be recognizing these trends since the stock has only returned a total of 0.8% to shareholders over the last three years. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.
If you want to continue researching Grocery Outlet Holding, you might be interested to know about the 2 warning signs that our analysis has discovered.