Finding a business that has the potential to grow significantly isn’t easy, but it is possible if we look at a few key financial metrics. Typically, we will want to notice a growth trend come back on capital employed (ROCE) and at the same time, a base capital employed. If you see this, it usually means it’s a company with a great business model and lots of profitable reinvestment opportunities. Therefore, when we briefly examined Costco Wholesale (NASDAQ:COST) Trending ROCE, we were very pleased with what we saw.
Return on capital employed (ROCE): what is it?
For those unaware, ROCE is a measure of a company’s annual pre-tax profit (yield), relative to the capital employed in the business. To calculate this metric for Costco Wholesale, here is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.24 = $7.8 billion ÷ ($64 billion – $32 billion) (Based on the last twelve months to August 2022).
Therefore, Costco Wholesale has a ROCE of 24%. That’s a fantastic return and not only that, it tops the 8.8% average earned by companies in a similar industry.
Check out our latest analysis for Costco Wholesale
Above, you can see how Costco Wholesale’s current ROCE compares to its past returns on capital, but you can’t tell much about the past. If you’re interested, you can check out analyst forecasts in our free analyst forecast report for the company.
What is the return trend?
In terms of Costco Wholesale’s ROCE history, that’s pretty impressive. The company has employed 72% more capital over the past five years, and the return on that capital has remained stable at 24%. Now considering the ROCE is an attractive 24%, this combination is actually quite attractive because it means the company can consistently put money to work and generate those high returns. If Costco Wholesale can continue like this, we would be very optimistic about its future.
On a separate but related note, it’s important to know that Costco Wholesale has a current liabilities to total assets ratio of 50%, which we would consider quite high. This effectively means that suppliers (or short-term creditors) finance a large part of the business, so just be aware that this may introduce some elements of risk. Ideally, we would like this to decrease, as this would mean fewer risky bonds.
In summary, we are pleased to see that Costco Wholesale has accrued returns by reinvesting at consistently high rates of return, as these are common characteristics of a multi-bagger. And long-term investors would be delighted with the 223% return they’ve received over the past five years. So while the stock may be more “expensive” than it used to be, we believe the strong fundamentals warrant this stock for further research.
If you want to further research Costco Wholesale, you may be interested in knowing the 1 warning sign that our analysis found.
If you want to see other businesses earning high returns, check out our free list of companies earning high returns with strong balance sheets here.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.