Monro (NASDAQ: MNRO) could have capital allocation issues

To find multi-bagger stock, what are the underlying trends we need to look for in a business? Among other things, we’ll want to see two things; first, a growth to recover on capital employed (ROCE) and on the other hand, an expansion of the amount capital employed. Ultimately, this demonstrates that this is a company that is reinvesting its profits at increasing rates of return. Although, when we considered Monro (NASDAQ: MNRO), it doesn’t appear to have ticked all of those boxes.

Return on capital employed (ROCE): what is it?

For those who don’t know what ROCE is, it measures the amount of pre-tax profit a business can generate from the capital employed in its business. The formula for this calculation on Monro is:

Return on capital employed = Profit before interest and taxes (EBIT) ÷ (Total assets – Current liabilities)

0.059 = US $ 93 million ÷ (US $ 1.9 billion – US $ 320 million) (Based on the last twelve months up to June 2021).

Therefore, Monro has a ROCE of 5.9%. In absolute terms, this is a low return and it is also below the 18% specialty retail industry average.

See our latest review for Monro

NasdaqGS: MNRO Return on capital employed on October 2, 2021

Above you can see how Monro’s current ROCE compares to its previous returns on capital, but there is little 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 Monro.

The ROCE trend

In terms of Monro’s historic ROCE movements, the trend is not great. To be more precise, ROCE has increased by 13% over the past five years. On the flip side, the company has used more capital without a corresponding improvement in sales over the past year, which might suggest that these investments are longer-term games. It’s worth keeping an eye on the company’s profits from now on to see if those investments end up contributing to the bottom line.

The bottom line

Putting all of this together, while we are somewhat encouraged by Monro’s reinvestment in his own business, we are aware that the returns are diminishing. And investors may be recognizing these trends since the stock has only returned a total of 2.5% to shareholders over the past five years. Therefore, if you are looking for a multi-bagger, we think you would have better luck elsewhere.

If you are still interested in Monro, it is worth checking out our FREE approximation of intrinsic value to see if it trades attractively in other respects.

While Monro does not currently generate the highest returns, we have compiled a list of companies that currently generate over 25% return on equity. Check it out free list here.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in the mentioned stocks.

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