- Oops!Something went wrong.Please try again later.
What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. With that in mind, we've noticed some promising trends at SiteOne Landscape Supply (NYSE:SITE) so let's look a bit deeper.
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 SiteOne Landscape Supply, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.15 = US$213m ÷ (US$1.9b - US$502m) (Based on the trailing twelve months to April 2021).
Thus, SiteOne Landscape Supply has an ROCE of 15%. On its own, that's a standard return, however it's much better than the 10.0% generated by the Trade Distributors industry.
In the above chart we have measured SiteOne Landscape Supply'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 SiteOne Landscape Supply's ROCE Trend?
We like the trends that we're seeing from SiteOne Landscape Supply. The data shows that returns on capital have increased substantially over the last five years to 15%. Basically the business is earning more per dollar of capital invested and in addition to that, 157% more capital is being employed now too. So we're very much inspired by what we're seeing at SiteOne Landscape Supply thanks to its ability to profitably reinvest capital.
Our Take On SiteOne Landscape Supply's ROCE
All in all, it's terrific to see that SiteOne Landscape Supply is reaping the rewards from prior investments and is growing its capital base. And a remarkable 367% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if SiteOne Landscape Supply can keep these trends up, it could have a bright future ahead.
One more thing to note, we've identified 2 warning signs with SiteOne Landscape Supply and understanding them should be part of your investment process.
While SiteOne Landscape Supply 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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.