Stock Analysis

Investors Met With Slowing Returns on Capital At Sprouts Farmers Market (NASDAQ:SFM)

NasdaqGS:SFM
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To find a multi-bagger stock, what are the underlying trends we should look for in a business? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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.

Return On Capital Employed (ROCE): What Is It?

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. 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)

0.14 = US$347m ÷ (US$3.0b - US$515m) (Based on the trailing twelve months to July 2022).

Thus, Sprouts Farmers Market has an ROCE of 14%. On its own, that's a standard return, however it's much better than the 9.2% generated by the Consumer Retailing industry.

Check out our latest analysis for Sprouts Farmers Market

roce
NasdaqGS:SFM Return on Capital Employed September 10th 2022

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 current returns on capital are decent, they haven't changed much. The company has consistently earned 14% for the last five years, and the capital employed within the business has risen 98% in that time. 14% is a pretty standard return, and it provides some comfort knowing that Sprouts Farmers Market has consistently earned this amount. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.

The Key Takeaway

To sum it up, Sprouts Farmers Market has simply been reinvesting capital steadily, at those decent rates of return. And since the stock has risen strongly over the last five years, it appears the market might expect this trend to continue. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.

Sprouts Farmers Market does have some risks, we noticed 2 warning signs (and 1 which doesn't sit too well with us) we think you should know about.

While Sprouts Farmers Market may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

Valuation is complex, but we're helping make it simple.

Find out whether Sprouts Farmers Market is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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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.