Sprouts Farmers Market (NASDAQ:SFM) Is Experiencing Growth In Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Speaking of which, we noticed some great changes in Sprouts Farmers Market's (NASDAQ:SFM) returns on capital, so let's have a look.

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. 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)

0.16 = US$470m ÷ (US$3.6b - US$616m) (Based on the trailing twelve months to September 2024).

Therefore, Sprouts Farmers Market has an ROCE of 16%. On its own, that's a standard return, however it's much better than the 11% generated by the Consumer Retailing industry.

Check out our latest analysis for Sprouts Farmers Market

Above you can see how the current ROCE for Sprouts Farmers Market compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Sprouts Farmers Market .

So How Is Sprouts Farmers Market's ROCE Trending?

We like the trends that we're seeing from Sprouts Farmers Market. The data shows that returns on capital have increased substantially over the last five years to 16%. The amount of capital employed has increased too, by 30%. So we're very much inspired by what we're seeing at Sprouts Farmers Market thanks to its ability to profitably reinvest capital.

The Bottom Line On Sprouts Farmers Market's ROCE

To sum it up, Sprouts Farmers Market has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And a remarkable 688% total return over the last five years tells us that investors are expecting more good things to come in the future. Therefore, we think it would be worth your time to check if these trends are going to continue.

If you want to continue researching Sprouts Farmers Market, you might be interested to know about the 1 warning sign that our analysis has discovered.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.