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What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. So when we looked at BJ's Wholesale Club Holdings (NYSE:BJ) and its trend of ROCE, we really liked what we saw.
Return On Capital Employed (ROCE): What is it?
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on BJ's Wholesale Club Holdings is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.18 = US$597m ÷ (US$5.5b - US$2.2b) (Based on the trailing twelve months to October 2020).
So, BJ's Wholesale Club Holdings has an ROCE of 18%. On its own, that's a standard return, however it's much better than the 11% generated by the Consumer Retailing industry.
In the above chart we have measured BJ's Wholesale Club Holdings' 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 BJ's Wholesale Club Holdings.
What Can We Tell From BJ's Wholesale Club Holdings' ROCE Trend?
Investors would be pleased with what's happening at BJ's Wholesale Club Holdings. The numbers show that in the last three years, the returns generated on capital employed have grown considerably to 18%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 76%. So we're very much inspired by what we're seeing at BJ's Wholesale Club Holdings thanks to its ability to profitably reinvest capital.
On a separate but related note, it's important to know that BJ's Wholesale Club Holdings has a current liabilities to total assets ratio of 40%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.
The Bottom Line
All in all, it's terrific to see that BJ's Wholesale Club Holdings is reaping the rewards from prior investments and is growing its capital base. And with a respectable 90% awarded to those who held the stock over the last year, you could argue that these developments are starting to get the attention they deserve. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.
If you want to continue researching BJ's Wholesale Club Holdings, you might be interested to know about the 2 warning signs that our analysis has discovered.
While BJ's Wholesale Club Holdings isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
This article by Simply Wall St is general in nature. 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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