Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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 Roots (TSE:ROOT) and its trend of ROCE, we really liked what we saw.

We've discovered 1 warning sign about Roots. View them for free.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Roots:

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

0.056 = CA$15m ÷ (CA$329m - CA$67m) (Based on the trailing twelve months to February 2025).

Therefore, Roots has an ROCE of 5.6%. Ultimately, that's a low return and it under-performs the Specialty Retail industry average of 11%.

See our latest analysis for Roots

Above you can see how the current ROCE for Roots compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Roots for free.

The Trend Of ROCE

You'd find it hard not to be impressed with the ROCE trend at Roots. We found that the returns on capital employed over the last five years have risen by 56%. That's a very favorable trend because this means that the company is earning more per dollar of capital that's being employed. Interestingly, the business may be becoming more efficient because it's applying 30% less capital than it was five years ago. If this trend continues, the business might be getting more efficient but it's shrinking in terms of total assets.

The Key Takeaway

In the end, Roots has proven it's capital allocation skills are good with those higher returns from less amount of capital. And a remarkable 183% total return over the last five years tells us that investors are expecting more good things to come in the future. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

One more thing to note, we've identified 1 warning sign with Roots and understanding it should be part of your investment process.