Slowing Rates Of Return At Wm Morrison Supermarkets (LON:MRW) Leave Little Room For Excitement

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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after investigating Wm Morrison Supermarkets (LON:MRW), we don't think it's current trends fit the mold of a multi-bagger.

What is 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. Analysts use this formula to calculate it for Wm Morrison Supermarkets:

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

0.04 = UK£322m ÷ (UK£11b - UK£3.0b) (Based on the trailing twelve months to January 2021).

Therefore, Wm Morrison Supermarkets has an ROCE of 4.0%. Ultimately, that's a low return and it under-performs the Consumer Retailing industry average of 13%.

View our latest analysis for Wm Morrison Supermarkets

roce

Above you can see how the current ROCE for Wm Morrison Supermarkets 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 Wm Morrison Supermarkets here for free.

What Can We Tell From Wm Morrison Supermarkets' ROCE Trend?

There are better returns on capital out there than what we're seeing at Wm Morrison Supermarkets. The company has employed 23% more capital in the last five years, and the returns on that capital have remained stable at 4.0%. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

What We Can Learn From Wm Morrison Supermarkets' ROCE

As we've seen above, Wm Morrison Supermarkets' returns on capital haven't increased but it is reinvesting in the business. And investors may be recognizing these trends since the stock has only returned a total of 15% to shareholders over the last five years. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

Wm Morrison Supermarkets does come with some risks though, we found 4 warning signs in our investment analysis, and 1 of those is a bit concerning...

While Wm Morrison Supermarkets may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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