Stock Analysis

Returns On Capital At Sanford (NZSE:SAN) Paint An Interesting Picture

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NZSE:SAN
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If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Sanford (NZSE:SAN) and its ROCE trend, we weren't exactly thrilled.

Understanding 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 Sanford, this is the formula:

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

0.042 = NZ$34m ÷ (NZ$932m - NZ$121m) (Based on the trailing twelve months to September 2020).

So, Sanford has an ROCE of 4.2%. Ultimately, that's a low return and it under-performs the Food industry average of 7.1%.

View our latest analysis for Sanford

roce
NZSE:SAN Return on Capital Employed December 17th 2020

Above you can see how the current ROCE for Sanford compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

How Are Returns Trending?

When we looked at the ROCE trend at Sanford, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 4.2% from 7.1% five years ago. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

The Bottom Line

In summary, we're somewhat concerned by Sanford's diminishing returns on increasing amounts of capital. Investors must expect better things on the horizon though because the stock has risen 5.1% in the last five years. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

If you want to continue researching Sanford, you might be interested to know about the 2 warning signs that our analysis has discovered.

While Sanford 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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