Yahoo Finance Grocery Outlet Holding (NASDAQ:GO) May Have Issues Allocating Its Capital
To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. Having said that, from a first glance at Grocery Outlet Holding (NASDAQ:GO) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
Return On Capital Employed (ROCE): What Is It?
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)
0.035 = US$86m ÷ (US$2.8b - US$287m) (Based on the trailing twelve months to October 2022).
Thus, Grocery Outlet Holding has an ROCE of 3.5%. Ultimately, that's a low return and it under-performs the Consumer Retailing industry average of 11%.
See 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, you can check out the forecasts from the analysts covering Grocery Outlet Holding here for free.
So How Is Grocery Outlet Holding's ROCE Trending?
In terms of Grocery Outlet Holding's historical ROCE movements, the trend isn't fantastic. Over the last four years, returns on capital have decreased to 3.5% from 6.7% four years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.
The Bottom Line On Grocery Outlet Holding's ROCE
While returns have fallen for Grocery Outlet Holding in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. These trends don't appear to have influenced returns though, because the total return from the stock has been mostly flat over the last three years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.
Grocery Outlet Holding does have some risks though, and we've spotted 1 warning sign for Grocery Outlet Holding that you might be interested in.
While Grocery Outlet Holding isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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