Grocery Outlet Holding (NASDAQ:GO) Has Some Way To Go To Become A Multi-Bagger

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. However, after briefly looking over the numbers, we don't think Grocery Outlet Holding (NASDAQ:GO) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Grocery Outlet Holding, this is the formula:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.036 = US$94m ÷ (US$3.0b - US$382m) (Based on the trailing twelve months to March 2024).

So, Grocery Outlet Holding has an ROCE of 3.6%. In absolute terms, that's a low return and it also under-performs the Consumer Retailing industry average of 10%.

See our latest analysis for Grocery Outlet Holding

roce

In the above chart we have measured Grocery Outlet Holding'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 Grocery Outlet Holding .

What Does the ROCE Trend For Grocery Outlet Holding Tell Us?

There are better returns on capital out there than what we're seeing at Grocery Outlet Holding. The company has employed 39% more capital in the last five years, and the returns on that capital have remained stable at 3.6%. 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.

The Key Takeaway

In summary, Grocery Outlet Holding has simply been reinvesting capital and generating the same low rate of return as before. Since the stock has declined 40% over the last five years, investors may not be too optimistic on this trend improving either. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

If you're still interested in Grocery Outlet Holding it's worth checking out our FREE intrinsic value approximation for GO to see if it's trading at an attractive price in other respects.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com