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Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So when we looked at the ROCE trend of W.W. Grainger (NYSE:GWW) we really liked what we saw.
What Is Return On Capital Employed (ROCE)?
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on W.W. Grainger is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.41 = US$2.7b ÷ (US$8.8b - US$2.3b) (Based on the trailing twelve months to December 2024).
Therefore, W.W. Grainger has an ROCE of 41%. In absolute terms that's a great return and it's even better than the Trade Distributors industry average of 11%.
See our latest analysis for W.W. Grainger
In the above chart we have measured W.W. Grainger'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 analyst report for W.W. Grainger .
What The Trend Of ROCE Can Tell Us
The trends we've noticed at W.W. Grainger are quite reassuring. The data shows that returns on capital have increased substantially over the last five years to 41%. Basically the business is earning more per dollar of capital invested and in addition to that, 51% more capital is being employed now too. So we're very much inspired by what we're seeing at W.W. Grainger thanks to its ability to profitably reinvest capital.
The Bottom Line On W.W. Grainger's ROCE
In summary, it's great to see that W.W. Grainger can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. And a remarkable 285% total return over the last five years tells us that investors are expecting more good things to come in the future. 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.