What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. That's why when we briefly looked at Alimentation Couche-Tard's (TSE:ATD) ROCE trend, we were pretty happy with what we saw.
Understanding Return On Capital Employed (ROCE)
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. To calculate this metric for Alimentation Couche-Tard, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.15 = US$3.6b ÷ (US$30b - US$6.0b) (Based on the trailing twelve months to April 2022).
Therefore, Alimentation Couche-Tard has an ROCE of 15%. In absolute terms, that's a satisfactory return, but compared to the Consumer Retailing industry average of 11% it's much better.
Above you can see how the current ROCE for Alimentation Couche-Tard compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
What Can We Tell From Alimentation Couche-Tard's ROCE Trend?
While the current returns on capital are decent, they haven't changed much. Over the past five years, ROCE has remained relatively flat at around 15% and the business has deployed 115% more capital into its operations. Since 15% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.
What We Can Learn From Alimentation Couche-Tard's ROCE
In the end, Alimentation Couche-Tard has proven its ability to adequately reinvest capital at good rates of return. And the stock has done incredibly well with a 100% return over the last five years, so long term investors are no doubt ecstatic with that result. So even though the stock might be more "expensive" than it was before, we think the strong fundamentals warrant this stock for further research.
While Alimentation Couche-Tard doesn't shine too bright in this respect, it's still worth seeing if the company is trading at attractive prices. You can find that out with our FREE intrinsic value estimation on our platform.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.
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