There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we’ll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, the ROCE of Home Depot (NYSE:HD) looks attractive right now, so lets see what the trend of returns can tell us.
Understanding Return On Capital Employed (ROCE)
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. The formula for this calculation on Home Depot is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.46 = US$24b ÷ (US$77b – US$24b) (Based on the trailing twelve months to October 2022).
Therefore, Home Depot has an ROCE of 46%. That’s a fantastic return and not only that, it outpaces the average of 17% earned by companies in a similar industry.
Above you can see how the current ROCE for Home Depot 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 Home Depot.
So How Is Home Depot’s ROCE Trending?
It’s hard not to be impressed by Home Depot’s returns on capital. Over the past five years, ROCE has remained relatively flat at around 46% and the business has deployed 81% more capital into its operations. With returns that high, it’s great that the business can continually reinvest its money at such appealing rates of return. If Home Depot can keep this up, we’d be very optimistic about its future.
The Bottom Line
In the end, the company has proven it can reinvest it’s capital at high rates of returns, which you’ll remember is a trait of a multi-bagger. Therefore it’s no surprise that shareholders have earned a respectable 85% return if they held over the last five years. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.
On a separate note, we’ve found 2 warning signs for Home Depot you’ll probably want to know about.
If you’d like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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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