Yahoo Finance Why The 24% Return On Capital At Woolworths Holdings (JSE:WHL) Should Have Your Attention
What are the early trends we should look for to identify a stock that could multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. So when we looked at the ROCE trend of Woolworths Holdings (JSE:WHL) we really liked what we saw.
Understanding 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 Woolworths Holdings:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.24 = R6.4b ÷ (R40b - R13b) (Based on the trailing twelve months to December 2023).
Therefore, Woolworths Holdings has an ROCE of 24%. In absolute terms that's a great return and it's even better than the Multiline Retail industry average of 7.5%.
See our latest analysis for Woolworths Holdings
In the above chart we have measured Woolworths 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 analyst report for Woolworths Holdings .
What Can We Tell From Woolworths Holdings' ROCE Trend?
Woolworths Holdings is showing promise given that its ROCE is trending up and to the right. The figures show that over the last five years, ROCE has grown 35% whilst employing roughly the same amount of capital. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.
In Conclusion...
In summary, we're delighted to see that Woolworths Holdings has been able to increase efficiencies and earn higher rates of return on the same amount of capital. Since the stock has returned a solid 55% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. 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.
Woolworths Holdings does have some risks though, and we've spotted 2 warning signs for Woolworths Holdings that you might be interested in.
If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.
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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.
