There are a few key trends to look for if we want to identify the next multi-bagger. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, 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. So when we looked at Petco Health and Wellness Company (NASDAQ:WOOF) and its trend of ROCE, we really liked what we saw.
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Petco Health and Wellness Company is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.056 = US$303m ÷ (US$6.5b – US$1.0b) (Based on the trailing twelve months to October 2021).
Thus, Petco Health and Wellness Company has an ROCE of 5.6%. Ultimately, that's a low return and it under-performs the Specialty Retail industry average of 21%.
Check out our latest analysis for Petco Health and Wellness Company
In the above chart we have measured Petco Health and Wellness Company'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 Petco Health and Wellness Company.
Petco Health and Wellness Company has not disappointed with their ROCE growth. The figures show that over the last two years, ROCE has grown 100% whilst employing roughly the same amount of capital. So it's likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn't changed considerably. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.
To bring it all together, Petco Health and Wellness Company has done well to increase the returns it's generating from its capital employed. Astute investors may have an opportunity here because the stock has declined 33% in the last year. That being the case, research into the company's current valuation metrics and future prospects seems fitting.
If you'd like to know more about Petco Health and Wellness Company, we've spotted 3 warning signs, and 1 of them is potentially serious.
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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