If we are to find a title that could multiply in the long run, what are the underlying trends that we need to look for? A common approach is to try to find a business with Return on capital employed (ROCE) which increases, in connection with growth amount capital employed. Put simply, these types of businesses are dialing machines, which means they continually reinvest their profits at ever higher rates of return. However, after briefly reviewing the numbers, we don’t think Sysco (NYSE: SYY) has the makings of a multi-bagger in the future, but let’s see why it may be.
Understanding Return on Capital Employed (ROCE)
For those who don’t know, ROCE is a measure of a company’s annual pre-tax profit (its return), relative to the capital employed in the company. The formula for this calculation on Sysco is:
Return on capital employed = Profit before interest and taxes (EBIT) ÷ (Total assets – Current liabilities)
0.049 = $ 734 million ÷ ($ 22 billion – $ 7.0 billion) (Based on the last twelve months up to March 2021).
Therefore, Sysco has a ROCE of 4.9%. Ultimately, that’s a low return and it’s below the retail industry average of 8.8%.
See our latest review for Sysco
Above you can see how Sysco’s current ROCE compares to its previous returns on capital, but there isn’t much you can say about the past. If you’d like to see what analysts are forecasting for the future, you should check out our free report for Sysco.
So what’s the Sysco ROCE trend?
In terms of Sysco’s historic ROCE movements, the trend is not great. To be more precise, ROCE has increased by 20% over the past five years. And since incomes have fallen while employing more capital, we would be cautious. If this were to continue, you might consider a business that is trying to reinvest for growth, but is actually losing market share since sales haven’t increased.
Our opinion on Sysco’s ROCE
In summary, we are somewhat concerned about Sysco’s diminishing returns on increasing amounts of capital. Yet despite these worrisome fundamentals, the stock has performed very well with a 60% return over the past five years, so investors appear very bullish. Either way, the current underlying trends do not bode well for long term performance, so unless they reverse we would start looking elsewhere.
One more thing: we have identified 2 warning signs with Sysco (at least 1 which cannot be ignored), and understanding them would definitely help.
While Sysco does not currently achieve the highest returns, we have compiled a list of companies that currently generate over 25% return on equity. Check it out free list here.
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