Investors Met With Slowing Returns on Capital At Sleep Country Canada Holdings (TSE:ZZZ)

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What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we’d want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. So, when we ran our eye over Sleep Country Canada Holdings’ (TSE:ZZZ) trend of ROCE, we liked what we saw.

What Is Return On Capital Employed (ROCE)?

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. The formula for this calculation on Sleep Country Canada Holdings is:

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

0.19 = CA$153m ÷ (CA$988m – CA$196m) (Based on the trailing twelve months to September 2022).

Thus, Sleep Country Canada Holdings has an ROCE of 19%. In absolute terms, that’s a pretty normal return, and it’s somewhat close to the Specialty Retail industry average of 16%.

View our latest analysis for Sleep Country Canada Holdings

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Above you can see how the current ROCE for Sleep Country Canada Holdings compares to its prior returns on capital, but there’s only so much you can tell from the past. If you’re interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

How Are Returns Trending?

While the returns on capital are good, they haven’t moved much. The company has consistently earned 19% for the last five years, and the capital employed within the business has risen 90% in that time. 19% is a pretty standard return, and it provides some comfort knowing that Sleep Country Canada Holdings has consistently earned this amount. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.

What We Can Learn From Sleep Country Canada Holdings’ ROCE

In the end, Sleep Country Canada Holdings has proven its ability to adequately reinvest capital at good rates of return. However, despite the favorable fundamentals, the stock has fallen 12% over the last five years, so there might be an opportunity here for astute investors. That’s why we think it’d be worthwhile to look further into this stock given the fundamentals are appealing.

Like most companies, Sleep Country Canada Holdings does come with some risks, and we’ve found 1 warning sign that you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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