The Returns On Capital At SunOpta (TSE:SOY) Don't Inspire Confidence

What financial metrics can indicate to us that a company is maturing or even in decline? A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. This reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. On that note, looking into SunOpta (TSE:SOY), we weren't too upbeat about how things were going.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for SunOpta:

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

0.032 = US$14m ÷ (US$586m - US$136m) (Based on the trailing twelve months to January 2021).

So, SunOpta has an ROCE of 3.2%. In absolute terms, that's a low return and it also under-performs the Food industry average of 8.9%.

View our latest analysis for SunOpta

Above you can see how the current ROCE for SunOpta compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for SunOpta.

So How Is SunOpta's ROCE Trending?

The trend of ROCE at SunOpta is showing some signs of weakness. Unfortunately, returns have declined substantially over the last five years to the 3.2% we see today. On top of that, the business is utilizing 46% less capital within its operations. The combination of lower ROCE and less capital employed can indicate that a business is likely to be facing some competitive headwinds or seeing an erosion to its moat. Typically businesses that exhibit these characteristics aren't the ones that tend to multiply over the long term, because statistically speaking, they've already gone through the growth phase of their life cycle.

In Conclusion...

In summary, it's unfortunate that SunOpta is shrinking its capital base and also generating lower returns. The market must be rosy on the stock's future because even though the underlying trends aren't too encouraging, the stock has soared 207%. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

SunOpta does have some risks though, and we've spotted 2 warning signs for SunOpta that you might be interested in.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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