What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So when we looked at Tractor Supply (NASDAQ:TSCO), they do have a high ROCE, but we weren't exactly elated from how returns are trending.

Understanding 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. Analysts use this formula to calculate it for Tractor Supply:

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

0.21 = US$1.5b ÷ (US$9.2b - US$2.2b) (Based on the trailing twelve months to December 2023).

Therefore, Tractor Supply has an ROCE of 21%. In absolute terms that's a great return and it's even better than the Specialty Retail industry average of 14%.

See our latest analysis for Tractor Supply

In the above chart we have measured Tractor Supply'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 Tractor Supply for free.

What Does the ROCE Trend For Tractor Supply Tell Us?

On the surface, the trend of ROCE at Tractor Supply doesn't inspire confidence. While it's comforting that the ROCE is high, five years ago it was 32%. However it looks like Tractor Supply might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

The Key Takeaway

To conclude, we've found that Tractor Supply is reinvesting in the business, but returns have been falling. Yet to long term shareholders the stock has gifted them an incredible 196% return in the last five years, so the market appears to be rosy about its future. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

Like most companies, Tractor Supply does come with some risks, and we've found 2 warning signs that you should be aware of.