According to Benzinga Pro data 3M (NYSE:MMM) posted a 2.76% decrease in earnings from Q4. Sales, however, increased by 2.52% over the previous quarter to $8.83 billion. Despite the increase in sales this quarter, the decrease in earnings may suggest 3M is not utilizing their capital as effectively as possible. 3M reached earnings of $1.34 billion and sales of $8.61 billion in Q4.
Why Is ROCE Significant?
Earnings data without context is not clear and can be difficult to base trading decisions on. Return on Capital Employed (ROCE) helps to filter signal from noise by measuring yearly pre-tax profit relative to capital employed by a business. Generally, a higher ROCE suggests successful growth of a company and is a sign of higher earnings per share in the future. In Q1, 3M posted an ROCE of 0.09%.
It is important to keep in mind that ROCE evaluates past performance and is not used as a predictive tool. It is a good measure of a company's recent performance, but does not account for factors that could affect earnings and sales in the near future.
ROCE is a powerful metric for comparing the effectiveness of capital allocation for similar companies. A relatively high ROCE shows 3M is potentially operating at a higher level of efficiency than other companies in its industry. If the company is generating high profits with its current level of capital, some of that money can be reinvested in more capital which will generally lead to higher returns and, ultimately, earnings per share (EPS) growth.
For 3M, the positive return on capital employed ratio of 0.09% suggests that management is allocating their capital effectively. Effective capital allocation is a positive indicator that a company will achieve more durable success and favorable long-term returns.
Upcoming Earnings Estimate
3M reported Q1 earnings per share at $2.65/share, which beat analyst predictions of $2.31/share.
This article was generated by Benzinga's automated content engine and reviewed by an editor.
