Stock Analysis

Should We Be Excited About The Trends Of Returns At Sanford (NZSE:SAN)?

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NZSE:SAN
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Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at Sanford (NZSE:SAN), it didn't seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Sanford is:

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).

Thus, Sanford has an ROCE of 4.2%. In absolute terms, that's a low return and it also under-performs the Food industry average of 7.3%.

See our latest analysis for Sanford

roce
NZSE:SAN Return on Capital Employed March 18th 2021

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?

In terms of Sanford's historical ROCE movements, the trend isn't fantastic. 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. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

Our Take On Sanford's ROCE

In summary, we're somewhat concerned by Sanford's diminishing returns on increasing amounts of capital. It should come as no surprise then that the stock has fallen 15% over the last five years, so it looks like investors are recognizing these changes. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

On a separate note, we've found 2 warning signs for Sanford you'll probably want to know about.

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