It’s All About Capital Returns

Jul 11, 2023 | Macro Insights, No Bull Economics

Fundamental financial analysis focuses on capital returns (net income/debt + equity) to assess how well a company allocates its capital. If a company’s capital return exceeds its capital financing costs, it cannot help but grow larger. In this post, we look at the capital returns of the 85 consumer companies under our coverage.

Commentary

  • What is most notable from a benchmarking of capital returns for consumer retail companies is the wide dispersion of performance, with a low of double-digit declines to a high of +45%.
  • Further, it is notable that the median capital return is just +6.7% – not much higher than the cost of corporate debt & certainly lower than the risk-adjusted cost of equity. This suggests that consumer companies are not finding a lot of profitable investments in a crowded fight for wallet share.
Return on Capital Consumer Stocks Chart
  • A look at the top-performing consumer companies reveals the power of the franchising business model (restaurants & hotels) which allows franchisors to leverage the capital investments of their franchisees. While franchisors may invest in their system’s IT infrastructure, the bulk of their system’s investment needs are funded by franchisees who pay for new builds & remodels.
  • Also, evident below is the power of brands in generating high capital returns, with companies like Home Depot, Lowes, and Coke making the list of top performers.  
Consumer Companies with Highest LTM Capital Returns Graph

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