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There are a few key trends to look for if we want to identify the next 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. That's why when we briefly looked at SiteOne Landscape Supply's (NYSE:SITE) ROCE trend, we were pretty happy with what we saw.
Return On Capital Employed (ROCE): What Is It?
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 SiteOne Landscape Supply:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.12 = US$272m ÷ (US$2.9b - US$683m) (Based on the trailing twelve months to July 2023).
Thus, SiteOne Landscape Supply has an ROCE of 12%. That's a relatively normal return on capital, and it's around the 14% generated by the Trade Distributors industry.
View our latest analysis for SiteOne Landscape Supply
In the above chart we have measured SiteOne Landscape Supply's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
What Can We Tell From SiteOne Landscape Supply's ROCE Trend?
While the current returns on capital are decent, they haven't changed much. The company has consistently earned 12% for the last five years, and the capital employed within the business has risen 150% in that time. 12% is a pretty standard return, and it provides some comfort knowing that SiteOne Landscape Supply has consistently earned this amount. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.
The Bottom Line On SiteOne Landscape Supply's ROCE
To sum it up, SiteOne Landscape Supply has simply been reinvesting capital steadily, at those decent rates of return. And the stock has followed suit returning a meaningful 78% to shareholders over the last five years. So even though the stock might be more "expensive" than it was before, we think the strong fundamentals warrant this stock for further research.
If you want to continue researching SiteOne Landscape Supply, you might be interested to know about the 1 warning sign that our analysis has discovered.