Should You Be Impressed By Sprouts Farmers Market's (NASDAQ:SFM) Returns on Capital?

If you're looking for a multi-bagger, there's a few things to keep an eye out 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. With that in mind, the ROCE of Sprouts Farmers Market (NASDAQ:SFM) looks decent, right now, so lets see what the trend of returns can tell us.

Return On Capital Employed (ROCE): What is it?

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. 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)

0.15 = US$347m ÷ (US$2.8b - US$510m) (Based on the trailing twelve months to September 2020).

Thus, Sprouts Farmers Market has an ROCE of 15%. On its own, that's a standard return, however it's much better than the 11% generated by the Consumer Retailing industry.

View our latest analysis for Sprouts Farmers Market

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 The Trend Of ROCE Can 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 15% and the business has deployed 88% more capital into its operations. 15% 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.

In Conclusion...

The main thing to remember is that Sprouts Farmers Market has proven its ability to continually reinvest at respectable rates of return. Yet over the last five years the stock has declined 21%, so the decline might provide an opening. That's why we think it'd be worthwhile to look further into this stock given the fundamentals are appealing.

Sprouts Farmers Market does have some risks though, and we've spotted 1 warning sign for Sprouts Farmers Market 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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This article by Simply Wall St is general in nature. 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.
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