July 24, 2024
Investors

Investors Met With Slowing Returns on Capital At Walmart (NYSE:WMT)


If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? In a perfect world, we’d like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. This shows us that it’s a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after investigating Walmart (NYSE:WMT), we don’t think it’s current trends fit the mold of a multi-bagger.

Return On Capital Employed (ROCE): What Is It?

For those who don’t know, ROCE is a measure of a company’s yearly pre-tax profit (its return), relative to the capital employed in the 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$92b) (Based on the trailing twelve months to January 2024).

Thus, Walmart has an ROCE of 17%. In absolute terms, that’s a satisfactory return, but compared to the Consumer Retailing industry average of 12% it’s much better.

Check out our latest analysis for Walmart

NYSE:WMT Return on Capital Employed May 1st 2024

In the above chart we have measured Walmart’s prior ROCE against its prior performance, but the future is arguably more important. If you’re interested, you can view the analysts predictions in our free analyst report for Walmart .

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. This probably explains why Walmart is paying out 33% of its income to shareholders in the form of dividends. Unless businesses have highly compelling growth opportunities, they’ll typically return some money to shareholders.

Our Take On Walmart’s ROCE

We can conclude that in regards to Walmart’s returns on capital employed and the trends, there isn’t much change to report on. Since the stock has gained an impressive 91% over the last five years, investors must think there’s better things to come. Ultimately, if the underlying trends persist, we wouldn’t hold our breath on it being a multi-bagger going forward.

If you want to continue researching Walmart, you might be interested to know about the 1 warning sign that our analysis has discovered.

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.

Valuation is complex, but we’re helping make it simple.

Find out whether Walmart is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

View the Free Analysis

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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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