What Do The Returns On Capital At Alimentation Couche-Tard (TSE:ATD.B) Tell Us?

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So, when we ran our eye over Alimentation Couche-Tard's (TSE:ATD.B) trend of ROCE, we liked what we saw.

Understanding Return On Capital Employed (ROCE)

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. To calculate this metric for Alimentation Couche-Tard, this is the formula:

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

0.16 = US$3.4b ÷ (US$26b - US$4.5b) (Based on the trailing twelve months to July 2020).

So, Alimentation Couche-Tard has an ROCE of 16%. In absolute terms, that's a satisfactory return, but compared to the Consumer Retailing industry average of 11% it's much better.

See our latest analysis for Alimentation Couche-Tard

roce

In the above chart we have measured Alimentation Couche-Tard'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 Alimentation Couche-Tard here for free.

So How Is Alimentation Couche-Tard's ROCE Trending?

While the current returns on capital are decent, they haven't changed much. The company has consistently earned 16% for the last five years, and the capital employed within the business has risen 152% in that time. 16% is a pretty standard return, and it provides some comfort knowing that Alimentation Couche-Tard has consistently earned this amount. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.

Our Take On Alimentation Couche-Tard's ROCE

The main thing to remember is that Alimentation Couche-Tard has proven its ability to continually reinvest at respectable rates of return. And the stock has followed suit returning a meaningful 56% to shareholders over the last five years. So even though the stock might be more "expensive" than it was before, we think the strong fundamentals warrant this stock for further research.

If you want to continue researching Alimentation Couche-Tard, you might be interested to know about the 2 warning signs that our analysis has discovered.

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.

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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