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To find a multi-bagger stock, what are the underlying trends we should look for in a business? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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. So, when we ran our eye over Sprouts Farmers Market's (NASDAQ:SFM) trend of ROCE, we liked what we saw.
What Is Return On Capital Employed (ROCE)?
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Sprouts Farmers Market, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.15 = US$387m ÷ (US$3.2b - US$538m) (Based on the trailing twelve months to July 2023).
So, Sprouts Farmers Market has an ROCE of 15%. That's a relatively normal return on capital, and it's around the 13% generated by the Consumer Retailing industry.
Check out our latest analysis for Sprouts Farmers Market
In the above chart we have measured Sprouts Farmers Market's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
How Are Returns Trending?
While the returns on capital are good, they haven't moved much. Over the past five years, ROCE has remained relatively flat at around 15% and the business has deployed 95% more capital into its operations. 15% is a pretty standard return, and it provides some comfort knowing that Sprouts Farmers Market has consistently earned this amount. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.
In Conclusion...
In the end, Sprouts Farmers Market has proven its ability to adequately reinvest capital at good rates of return. And the stock has followed suit returning a meaningful 57% to shareholders over the last five years. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.
Sprouts Farmers Market does have some risks though, and we've spotted 1 warning sign for Sprouts Farmers Market that you might be interested in.
While Sprouts Farmers Market isn't earning the highest return, check out this free list of companies that are 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.