Colgate-Palmolive (NYSE:CL) Returns Trends Are Not Attractive

If we want to find a potential multi-bagger, there are often hidden trends that can provide clues. First, we would like to identify a growing return on the capital employed (ROCE), and then steadily growing with it to lean capital employed. This shows us that it is a compounding machine, capable of continually reinvesting its profits back into the business and generating higher profits. Looking at Colgate-Palmolive (NYSE:CL), the company currently has a high ROCE, but let’s wait and see how the return trends change.

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 on the capital it employs in its business. Analysts use this formula to calculate it for Colgate-Palmolive:

Return on Capital Employed = Earnings Before Interest and Taxes (EBIT) ÷ (Total Assets – Current Liabilities)

0.38 = $4.2 billion ÷ ($16 billion – $5.4 billion) (Based on the last twelve months to June 2024).

Therefore, Colgate-Palmolive has an ROCE of 38%. In absolute terms, this is an excellent result, even better than the average for the household appliances industry of 19%.

See our latest analysis for Colgate-Palmolive

In the above chart, we measured Colgate-Palmolive’s previous ROCE against previous results, but the future is probably more important. If you want, you can check out the analyst forecasts covering Colgate-Palmolive at free.

What can we learn from Colgate-Palmolive’s ROCE trend?

Colgate-Palmolive’s ROCE and capital employed have remained largely unchanged over the past five years. It’s not unusual to see a mature and stable business that doesn’t reinvest its profits, as it’s likely already passed that stage of its business cycle. So it may not be a multi-bagger in the making, but given the respectable 38% return on capital, it would be hard to find fault with the company’s current operations. With fewer investment opportunities, it makes sense that Colgate-Palmolive is paying out a respectable 52% of its profits to shareholders. Given that the business doesn’t reinvest in itself, it makes sense to distribute some of the profits to shareholders.

Colgate-Palmolive ROCE Summary

In summary, Colgate-Palmolive is not growing its earnings but is generating decent returns on the same amount of capital employed. Although, the market must expect these trends to improve, as the stock has gained 59% over the past five years. Ultimately, if the fundamentals hold, we wouldn’t hold our breath for the company to see multiple growth in the future.

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This Simply Wall St article is for general information purposes only. Our commentary is based solely on historical data and analyst forecasts, and is based on an objective methodology. Our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or your financial situation. Our goal is to provide you with long-term, focused analysis based on fundamental data. Please note that our analysis may not reflect the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.