NASDAQ:COST) ROCE trend, we were pretty happy with what we saw.” data-reactid=”28″>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’d want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it’s a business that is reinvesting profits at increasing rates of return. That’s why when we briefly looked at Costco Wholesale’s (NASDAQ:COST) ROCE trend, we were pretty happy with 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. The formula for this calculation on Costco Wholesale is:
View our latest analysis for Costco Wholesale ” data-reactid=”38″> View our latest analysis for Costco Wholesale
here for free.” data-reactid=”51″>In the above chart we have measured Costco Wholesale’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 Costco Wholesale here for free.
What Does the ROCE Trend For Costco Wholesale Tell Us?
While the returns on capital are good, they haven’t moved much. The company has employed 73% more capital in the last five years, and the returns on that capital have remained stable at 18%. Since 18% is a moderate ROCE though, it’s good to see a business can continue to reinvest at these decent rates of return. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.
Another thing to note, Costco Wholesale has a high ratio of current liabilities to total assets of 44%. 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. While it’s not necessarily a bad thing, it can be beneficial if this ratio is lower.
Our Take On Costco Wholesale’s ROCE
In the end, Costco Wholesale has proven its ability to adequately reinvest capital at good rates of return. And the stock has done incredibly well with a 160% return over the last five years, so long term investors are no doubt ecstatic with that result. So even though the stock might be more “expensive” than it was before, we think the strong fundamentals warrant this stock for further research.
2 warning signs that you should be aware of.” data-reactid=”57″>If you’d like to know about the risks facing Costco Wholesale, we’ve discovered 2 warning signs that you should be aware of.
list of companies that are earning high returns on equity with solid balance sheets.” data-reactid=”58″>While Costco Wholesale isn’t earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
Get in touch with us directly. Alternatively, email [email protected].” data-reactid=”59″>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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