Natural Grocers by Vitamin Cottage (NYSE:NGVC) Has More To Do To Multiply In Value Going Forward

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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. In light of that, when we looked at Natural Grocers by Vitamin Cottage (NYSE:NGVC) and its ROCE trend, we weren't exactly thrilled.

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 Natural Grocers by Vitamin Cottage, this is the formula:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.08 = US$40m ÷ (US$657m - US$160m) (Based on the trailing twelve months to March 2024).

Thus, Natural Grocers by Vitamin Cottage has an ROCE of 8.0%. Ultimately, that's a low return and it under-performs the Consumer Retailing industry average of 10%.

See our latest analysis for Natural Grocers by Vitamin Cottage

Historical performance is a great place to start when researching a stock so above you can see the gauge for Natural Grocers by Vitamin Cottage's ROCE against it's prior returns. If you're interested in investigating Natural Grocers by Vitamin Cottage's past further, check out this free graph covering Natural Grocers by Vitamin Cottage's past earnings, revenue and cash flow.

What Does the ROCE Trend For Natural Grocers by Vitamin Cottage Tell Us?

The returns on capital haven't changed much for Natural Grocers by Vitamin Cottage in recent years. The company has consistently earned 8.0% for the last five years, and the capital employed within the business has risen 113% in that time. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

In Conclusion...

As we've seen above, Natural Grocers by Vitamin Cottage's returns on capital haven't increased but it is reinvesting in the business. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 299% gain to shareholders who have held over the last five years. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

If you'd like to know about the risks facing Natural Grocers by Vitamin Cottage, we've discovered 1 warning sign that you should be aware of.

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. 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.

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