Capital Allocation Trends At Sleep Country Canada Holdings (TSE:ZZZ) Aren't Ideal
What are the early trends we should look for to identify a stock that could multiply in value over the long term? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Having said that, from a first glance at Sleep Country Canada Holdings (TSE:ZZZ) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
Return On Capital Employed (ROCE): What Is It?
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. Analysts use this formula to calculate it for Sleep Country Canada Holdings:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.14 = CA$121m ÷ (CA$1.1b - CA$193m) (Based on the trailing twelve months to September 2023).
Therefore, Sleep Country Canada Holdings has an ROCE of 14%. That's a relatively normal return on capital, and it's around the 12% generated by the Specialty Retail industry.
See our latest analysis for Sleep Country Canada Holdings
Above you can see how the current ROCE for Sleep Country Canada Holdings compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Sleep Country Canada Holdings here for free.
The Trend Of ROCE
When we looked at the ROCE trend at Sleep Country Canada Holdings, we didn't gain much confidence. Around five years ago the returns on capital were 20%, but since then they've fallen to 14%. However it looks like Sleep Country Canada Holdings might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.
What We Can Learn From Sleep Country Canada Holdings' ROCE
Bringing it all together, while we're somewhat encouraged by Sleep Country Canada Holdings' reinvestment in its own business, we're aware that returns are shrinking. And with the stock having returned a mere 37% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.
Like most companies, Sleep Country Canada Holdings does come with some risks, and we've found 1 warning sign that you should be aware of.
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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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.
