Altria Group (NYSE:MO) Is Investing Its Capital With Increasing Efficiency
What trends should we look for it we want to identify stocks that can multiply in value over the long term? Amongst other things, we’ll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company’s amount of capital employed. This shows us that it’s a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Speaking of which, we noticed some great changes in Altria Group’s (NYSE:MO) returns on capital, so let’s have a look.
Return On Capital Employed (ROCE): What Is It?
If you haven’t worked with ROCE before, it measures the ‘return’ (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Altria Group is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.47 = US$12b ÷ (US$37b – US$12b) (Based on the trailing twelve months to June 2023).
Thus, Altria Group has an ROCE of 47%. In absolute terms that’s a great return and it’s even better than the Tobacco industry average of 18%.
Check out our latest analysis for Altria Group
In the above chart we have measured Altria Group’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 Altria Group here for free.
The Trend Of ROCE
We’re pretty happy with how the ROCE has been trending at Altria Group. We found that the returns on capital employed over the last five years have risen by 75%. The company is now earning US$0.5 per dollar of capital employed. Speaking of capital employed, the company is actually utilizing 31% less than it was five years ago, which can be indicative of a business that’s improving its efficiency. Altria Group may be selling some assets so it’s worth investigating if the business has plans for future investments to increase returns further still.
For the record though, there was a noticeable increase in the company’s current liabilities over the period, so we would attribute some of the ROCE growth to that. Effectively this means that suppliers or short-term creditors are now funding 31% of the business, which is more than it was five years ago. Keep an eye out for future increases because when the ratio of current liabilities to total assets gets particularly high, this can introduce some new risks for the business.
What We Can Learn From Altria Group’s ROCE
In summary, it’s great to see that Altria Group has been able to turn things around and earn higher returns on lower amounts of capital. Considering the stock has delivered 4.8% to its stockholders over the last five years, it may be fair to think that investors aren’t fully aware of the promising trends yet. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.
If you want to continue researching Altria Group, you might be interested to know about the 2 warning signs that our analysis has discovered.
High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.
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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.