Return trends at Sprouts Farmers Market (NASDAQ:SFM) are not attractive
If you’re looking for a multi-bagger, there are a few things to watch out for. First, we would like to identify a growth come back on capital employed (ROCE) and at the same time, a base capital employed. This shows us that it is a compounding machine, capable of continuously reinvesting its profits back into the business and generating higher returns. Therefore, when we briefly examined Sprouts Farmers Market’s (NASDAQ:SFM) ROCE trend, we were pretty happy with what we saw.
Understanding return on capital employed (ROCE)
Just to clarify if you’re not sure, ROCE is a measure of the pre-tax income (as a percentage) that a business earns on the capital invested in its business. Analysts use this formula to calculate it for Sprouts Farmers Market:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.14 = $344 million ÷ ($3.0 billion – $524 million) (Based on the last twelve months to April 2022).
Thereby, Sprouts Farmers Market has a ROCE of 14%. By itself, that’s a standard return, but it’s far better than the 9.1% generated by the retail industry.
Check out our latest analysis for Sprouts Farmers Market
In the chart above, we measured Sprouts Farmers Market’s past ROCE against its past performance, but the future is arguably more important. If you want, you can check analyst forecasts covering Sprouts Farmers Market here for free.
What does the ROCE trend tell us for the sprout grower market?
The ROCE trend isn’t showing much, but overall returns are decent. Over the past five years, ROCE has remained relatively stable at around 14% and the company has deployed 106% more capital into its operations. 14% is a pretty standard return, and it’s reassuring knowing that Sprouts Farmers Market has always earned that amount. Stable returns in this stage can be unexciting, but if they can be sustained over the long term, they often offer handsome rewards to shareholders.
What we can learn from Sprouts Farmers Market ROCE
To sum up, Sprouts Farmers Market has simply reinvested capital on a regular basis, at these decent rates of return. However, over the past five years, the stock has only offered a 10% return to shareholders who have held it during that time. That’s why it might be worth taking a closer look at this stock to find out if it has more characteristics of a multi-bagger.
Finally we found 2 warning signs for Sprouts Farmers Market which we think you should be aware of.
Although Sprouts Farmers Market is not currently generating the highest returns, we have compiled a list of companies that are currently generating over 25% return on equity. look at this free list here.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.