Why You Should Care About Colgate-Palmolive's (NYSE:CL) Strong Returns On Capital
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. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Ergo, when we looked at the ROCE trends at Colgate-Palmolive (NYSE:CL), we liked what we saw.
What Is Return On Capital Employed (ROCE)?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Colgate-Palmolive is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.37 = US$4.1b ÷ (US$17b - US$5.3b) (Based on the trailing twelve months to March 2024).
Thus, Colgate-Palmolive has an ROCE of 37%. In absolute terms that's a great return and it's even better than the Household Products industry average of 19%.
See our latest analysis for Colgate-Palmolive
In the above chart we have measured Colgate-Palmolive'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 Colgate-Palmolive for free.
What Does the ROCE Trend For Colgate-Palmolive Tell Us?
In terms of Colgate-Palmolive's history of ROCE, it's quite impressive. The company has consistently earned 37% for the last five years, and the capital employed within the business has risen 25% in that time. Now considering ROCE is an attractive 37%, this combination is actually pretty appealing because it means the business can consistently put money to work and generate these high returns. If Colgate-Palmolive can keep this up, we'd be very optimistic about its future.
Our Take On Colgate-Palmolive's ROCE
In short, we'd argue Colgate-Palmolive has the makings of a multi-bagger since its been able to compound its capital at very profitable rates of return. And since the stock has risen strongly over the last five years, it appears the market might expect this trend to continue. 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 1 warning sign with Colgate-Palmolive and understanding it 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.
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