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. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Having said that, from a first glance at Central Garden & Pet (NASDAQ:CENT) 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?
Just to clarify if you’re unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Central Garden & Pet, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.098 = US$184m ÷ (US$2.3b – US$385m) (Based on the trailing twelve months to June 2020).
Therefore, Central Garden & Pet has an ROCE of 9.8%. In absolute terms, that’s a low return and it also under-performs the Household Products industry average of 16%.
View our latest analysis for Central Garden & Pet
Above you can see how the current ROCE for Central Garden & Pet 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 Central Garden & Pet.
What Can We Tell From Central Garden & Pet’s ROCE Trend?
In terms of Central Garden & Pet’s historical ROCE trend, it doesn’t exactly demand attention. Over the past five years, ROCE has remained relatively flat at around 9.8% and the business has deployed 96% more capital into its operations. This poor ROCE doesn’t inspire confidence right now, and with the increase in capital employed, it’s evident that the business isn’t deploying the funds into high return investments.
As we’ve seen above, Central Garden & Pet’s returns on capital haven’t increased but it is reinvesting in the business. Investors must think there’s better things to come because the stock has knocked it out of the park delivering a 159% gain to shareholders who have held over the last five years. Ultimately, if the underlying trends persist, we wouldn’t hold our breath on it being a multi-bagger going forward.
On a separate note, we’ve found 1 warning sign for Central Garden & Pet you’ll probably want to know about.
While Central Garden & Pet isn’t earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
This article by Simply Wall St is general in nature. 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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