Walmart Stock – Investors Met With Slowing Returns on Capital At Walmart (NYSE:WMT)
To find a multi-bagger stock, what are the underlying trends we should look for in a business? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. Having said that, from a first glance at Walmart (NYSE:WMT) we aren’t jumping out of our chairs at how returns are trending, but let’s have a deeper look.
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. Analysts use this formula to calculate it for Walmart:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.17 = US$27b ÷ (US$252b – US$93b) (Based on the trailing twelve months to January 2021).
Therefore, Walmart has an ROCE of 17%. On its own, that’s a standard return, however it’s much better than the 9.8% generated by the Consumer Retailing industry.
Check out our latest analysis for Walmart
In the above chart we have measured Walmart’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 Walmart here for free.
The Trend Of ROCE
There hasn’t been much to report for Walmart’s returns and its level of capital employed because both metrics have been steady for the past five years. It’s not uncommon to see this when looking at a mature and stable business that isn’t re-investing its earnings because it has likely passed that phase of the business cycle. With that in mind, unless investment picks up again in the future, we wouldn’t expect Walmart to be a multi-bagger going forward. With fewer investment opportunities, it makes sense that Walmart has been paying out a decent 36% of its earnings to shareholders. Unless businesses have highly compelling growth opportunities, they’ll typically return some money to shareholders.
The Key Takeaway
We can conclude that in regards to Walmart’s returns on capital employed and the trends, there isn’t much change to report on. Yet to long term shareholders the stock has gifted them an incredible 128% return in the last five years, so the market appears to be rosy about its future. Ultimately, if the underlying trends persist, we wouldn’t hold our breath on it being a multi-bagger going forward.
Like most companies, Walmart does come with some risks, and we’ve found 1 warning sign that you should be aware of.
While Walmart may not currently earn the highest returns, we’ve compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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