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Did you know there are some financial metrics that can provide clues of a potential multi-bagger? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. 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 Loblaw Companies (TSE:L) and its trend of ROCE, we really liked what we saw.
What is 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 Loblaw Companies is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.11 = CA$2.9b ÷ (CA$36b - CA$9.0b) (Based on the trailing twelve months to October 2021).
Therefore, Loblaw Companies has an ROCE of 11%. By itself that's a normal return on capital and it's in line with the industry's average returns of 11%.
See our latest analysis for Loblaw Companies
Above you can see how the current ROCE for Loblaw Companies 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 Loblaw Companies.
What Can We Tell From Loblaw Companies' ROCE Trend?
Loblaw Companies has not disappointed with their ROCE growth. More specifically, while the company has kept capital employed relatively flat over the last five years, the ROCE has climbed 40% in that same time. 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. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.
What We Can Learn From Loblaw Companies' ROCE
To sum it up, Loblaw Companies is collecting higher returns from the same amount of capital, and that's impressive. And with a respectable 90% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.
Loblaw Companies does have some risks though, and we've spotted 1 warning sign for Loblaw Companies that you might be interested in.