Sprouts Farmers Market's (NASDAQ:SFM) Returns Have Hit A Wall

There are a few key trends to look for if we want to identify the next 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. 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)

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. 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$385m ÷ (US$3.3b - US$542m) (Based on the trailing twelve months to October 2023).

Therefore, Sprouts Farmers Market has an ROCE of 14%. On its own, that's a standard return, however it's much better than the 9.7% generated by the Consumer Retailing industry.

See 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 report for Sprouts Farmers Market.

How Are Returns Trending?

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 97% 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.

The Key Takeaway

To sum it up, Sprouts Farmers Market has simply been reinvesting capital steadily, at those decent rates of return. And long term investors would be thrilled with the 112% return they've received over the last five years. So even though the stock might be more "expensive" than it was before, we think the strong fundamentals warrant this stock for further research.

On a final note, we've found 1 warning sign for Sprouts Farmers Market that we think you should be aware of.

While Sprouts Farmers Market isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.