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US Foods Holding (NYSE:USFD) Could Be Struggling To Allocate Capital

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Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. However, after investigating US Foods Holding (NYSE:USFD), we don't think it's current trends fit the mold of a multi-bagger.

What is Return On Capital Employed (ROCE)?

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. Analysts use this formula to calculate it for US Foods Holding:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.047 = US$470m ÷ (US$13b - US$2.6b) (Based on the trailing twelve months to January 2022).

Thus, US Foods Holding has an ROCE of 4.7%. In absolute terms, that's a low return and it also under-performs the Consumer Retailing industry average of 8.0%.

View our latest analysis for US Foods Holding

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In the above chart we have measured US Foods Holding's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering US Foods Holding here for free.

How Are Returns Trending?

In terms of US Foods Holding's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 6.7% over the last five years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

The Bottom Line On US Foods Holding's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for US Foods Holding. In light of this, the stock has only gained 38% over the last five years. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.

US Foods Holding does have some risks though, and we've spotted 1 warning sign for US Foods Holding that you might be interested in.

While US Foods Holding may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.