What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we’ll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it’s a business that is reinvesting profits at increasing rates of return. With that in mind, the ROCE of Lowe’s Companies ((NYSE:(LOW))) looks great, so lets see what the trend can tell us.
Understanding 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 Lowe’s Companies is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.39 = US$11b ÷ (US$47b – US$19b) (Based on the trailing twelve months to January 2021).
Thus, Lowe’s Companies has an ROCE of 39%. In absolute terms that’s a great return and it’s even better than the Specialty Retail industry average of 13%.
See our latest analysis for Lowe’s Companies
In the above chart we have measured Lowe’s Companies’ prior ROCE against its prior performance, but the future is arguably more important. If you’d like, you can check out the forecasts from the analysts covering Lowe’s Companies here for free.
What Does the ROCE Trend For Lowe’s Companies Tell Us?
The trends we’ve noticed at Lowe’s Companies are quite reassuring. Over the last five years, returns on capital employed have risen substantially to 39%. The company is effectively making more money per dollar of capital used, and it’s worth noting that the amount of capital has increased too, by 34%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that’s why we’re impressed.
On a separate but related note, it’s important to know that Lowe’s Companies has a current liabilities to total assets ratio of 40%, which we’d consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it’s not necessarily a bad thing, it can be beneficial if this ratio is lower.
Our Take On Lowe’s Companies’ ROCE
A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that’s what Lowe’s Companies has. Since the stock has returned a staggering 173% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it’s worth looking further into this stock because if Lowe’s Companies can keep these trends up, it could have a bright future ahead.
Lowe’s Companies does have some risks though, and we’ve spotted 2 warning signs for Lowe’s Companies that you might be interested in.
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.
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