What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. 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 the ROCE trend of Altria Group (NYSE:MO) we really liked what we saw.
Return On Capital Employed (ROCE): What Is It?
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. The formula for this calculation on Altria Group is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.47 = US$12b ÷ (US$34b - US$8.1b) (Based on the trailing twelve months to September 2022).
Therefore, Altria Group has an ROCE of 47%. In absolute terms that's a great return and it's even better than the Tobacco industry average of 19%.
In the above chart we have measured Altria Group'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 report on analyst forecasts for the company.
What Can We Tell From Altria Group's ROCE Trend?
You'd find it hard not to be impressed with the ROCE trend at Altria Group. The data shows that returns on capital have increased by 80% over the trailing five years. The company is now earning US$0.5 per dollar of capital employed. Interestingly, the business may be becoming more efficient because it's applying 31% less capital than it was five years ago. Altria Group may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.
The Bottom Line
In the end, Altria Group has proven it's capital allocation skills are good with those higher returns from less amount of capital. Since the total return from the stock has been almost flat over the last five years, there might be an opportunity here if the valuation looks good. With that in mind, we believe the promising trends warrant this stock for further investigation.
One more thing to note, we've identified 2 warning signs with Altria Group and understanding them should be part of your investment process.
High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.
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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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