If you're looking for a multi-bagger, there's a few things to keep an eye out for. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. And in light of that, the trends we're seeing at W.W. Grainger's (NYSE:GWW) look very promising so lets take a look.
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. The formula for this calculation on W.W. Grainger is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.41 = US$2.6b ÷ (US$8.1b - US$1.9b) (Based on the trailing twelve months to September 2023).
Thus, W.W. Grainger has an ROCE of 41%. That's a fantastic return and not only that, it outpaces the average of 13% earned by companies in a similar industry.
Check out our latest analysis for W.W. Grainger
In the above chart we have measured W.W. Grainger's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for W.W. Grainger.
So How Is W.W. Grainger's ROCE Trending?
We like the trends that we're seeing from W.W. Grainger. Over the last five years, returns on capital employed have risen substantially to 41%. Basically the business is earning more per dollar of capital invested and in addition to that, 40% more capital is being employed now too. So we're very much inspired by what we're seeing at W.W. Grainger thanks to its ability to profitably reinvest capital.
The Bottom Line On W.W. Grainger's 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 W.W. Grainger has. Since the stock has returned a staggering 180% to shareholders over the last five years, it looks like investors are recognizing these changes. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.
If you'd like to know about the risks facing W.W. Grainger, we've discovered 1 warning sign that you should be aware of.
W.W. Grainger is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.
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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.