Capital Investments At Home Depot (NYSE:HD) Point To A Promising Future
If you're looking for a multi-bagger, there's a few things to keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. That's why when we briefly looked at Home Depot's (NYSE:HD) ROCE trend, we were very happy with what we saw.
Return On Capital Employed (ROCE): What Is It?
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. To calculate this metric for Home Depot, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.44 = US$23b ÷ (US$76b - US$24b) (Based on the trailing twelve months to July 2023).
So, Home Depot has an ROCE of 44%. In absolute terms that's a great return and it's even better than the Specialty Retail industry average of 13%.
Check out our latest analysis for Home Depot
In the above chart we have measured Home Depot'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 Home Depot here for free.
What The Trend Of ROCE Can Tell Us
It's hard not to be impressed by Home Depot's returns on capital. The company has employed 88% more capital in the last five years, and the returns on that capital have remained stable at 44%. Returns like this are the envy of most businesses and given it has repeatedly reinvested at these rates, that's even better. If Home Depot can keep this up, we'd be very optimistic about its future.
Our Take On Home Depot's ROCE
In summary, we're delighted to see that Home Depot has been compounding returns by reinvesting at consistently high rates of return, as these are common traits of a multi-bagger. And the stock has followed suit returning a meaningful 75% to shareholders over the last five years. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.
One more thing to note, we've identified 2 warning signs with Home Depot and understanding them should be part of your investment process.
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.
