Stock Analysis

Return Trends At Sprouts Farmers Market (NASDAQ:SFM) Aren't Appealing

NasdaqGS:SFM
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If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. That's why when we briefly looked at 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 unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company 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 = US$344m ÷ (US$3.0b - US$524m) (Based on the trailing twelve months to April 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 9.1% generated by the Consumer Retailing industry.

View our latest analysis for Sprouts Farmers Market

roce
NasdaqGS:SFM Return on Capital Employed June 5th 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'd like, you can check out the forecasts from the analysts covering Sprouts Farmers Market here for free.

What Does the ROCE Trend For Sprouts Farmers Market Tell Us?

The trend of ROCE doesn't stand out much, but returns on a whole are decent. Over the past five years, ROCE has remained relatively flat at around 14% and the business has deployed 106% more capital into its operations. 14% is a pretty standard return, and it provides some comfort knowing that Sprouts Farmers Market has consistently earned this amount. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.

What We Can Learn From Sprouts Farmers Market's ROCE

To sum it up, Sprouts Farmers Market has simply been reinvesting capital steadily, at those decent rates of return. However, over the last five years, the stock has only delivered a 10% return to shareholders who held over that period. That's why it could be worth your time looking into this stock further to discover if it has more traits of a multi-bagger.

On a final note, we've found 2 warning signs for Sprouts Farmers Market that we think you should be aware of.

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.