Canadian Tire Corporation (TSE:CTC.A) Has Some Way To Go To Become A Multi-Bagger
To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, the ROCE of Canadian Tire Corporation (TSE:CTC.A) looks decent, right now, so lets see what the trend of returns can tell us.
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 Canadian Tire Corporation is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.11 = CA$1.8b ÷ (CA$23b - CA$7.0b) (Based on the trailing twelve months to September 2023).
Thus, Canadian Tire Corporation has an ROCE of 11%. By itself that's a normal return on capital and it's in line with the industry's average returns of 11%.
View our latest analysis for Canadian Tire Corporation
Above you can see how the current ROCE for Canadian Tire Corporation 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.
So How Is Canadian Tire Corporation's ROCE Trending?
The trend of ROCE doesn't stand out much, but returns on a whole are decent. The company has employed 36% more capital in the last five years, and the returns on that capital have remained stable at 11%. 11% is a pretty standard return, and it provides some comfort knowing that Canadian Tire Corporation has consistently earned this amount. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.
In Conclusion...
In the end, Canadian Tire Corporation has proven its ability to adequately reinvest capital at good rates of return. However, over the last five years, the stock has only delivered a 12% return to shareholders who held over that period. So to determine if Canadian Tire Corporation is a multi-bagger going forward, we'd suggest digging deeper into the company's other fundamentals.
One final note, you should learn about the 3 warning signs we've spotted with Canadian Tire Corporation (including 1 which makes us a bit uncomfortable) .
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.
