This analysis is intended to introduce important early concepts to people who are starting to invest and want a simplistic look at the return on Starbucks Corporation (NASDAQ:SBUX) stock.
Starbucks stock represents an ownership share in the company. Owing to this, it is important that the underlying business is producing a sufficient amount of income from the capital invested by stockholders. You need to pay attention to this because your return on investment is linked to dividends and internal investments to improve the business, which can only occur if the company is expected to produce adequate earnings with the capital that has been provided. To understand Starbucks’s capital returns we will look at a useful metric called return on capital employed. This will tell us if the company is growing your capital and placing you in good stead to sell your shares at a profit.
ROCE: Explanation and Calculation
As an investor you have many alternative companies to choose from, which means there is an opportunity cost in any investment you make in the form of a foregone investment in another company. Accordingly, before you invest you need to assess the capital returns that the company has produced with reference to a certain benchmark to ensure that you are confident in the business’ ability to grow your capital at a level that grants an investment over other companies. A good metric to use is return on capital employed (ROCE), which helps us gauge how much income can be created from the funds needed to operate the business. This metric will tell us if Starbucks is good at growing investor capital. SBUX’s ROCE is calculated below:
ROCE Calculation for SBUX
Return on Capital Employed (ROCE) = Earnings Before Tax (EBT) ÷ (Capital Employed)
Capital Employed = (Total Assets – Current Liabilities)
∴ ROCE = US$4.23b ÷ (US$17.18b – US$5.55b) = 36.4%
As you can see, SBUX earned $36.4 from every $100 you invested over the previous twelve months. A good ROCE hurdle you should aim for in your investments is 15%, which is exceeded by SBUX and means the company creates an excellent amount of earnings on capital employed. If this can be sustained with good reinvestment opportunities or dividend distributions your capital has the potential to compound extremely well over time.
Does this mean I should invest?
The encouraging ROCE is good news for Starbucks investors if the company is able to maintain strong earnings and control their capital needs. But if this doesn’t occur, SBUX’s ROCE may deteriorate, in which case your money is better invested elsewhere. Therefore, investors need to be confident in the trend of the inputs in the formula above, so that Starbucks will continue the solid returns. Three years ago, SBUX’s ROCE was 39.4%, which means the company’s capital returns have worsened. Over the same period, EBT went from US$3.47b to US$4.23b but capital employed has grown by a proportionally greater amount due to a hike in the level of total assets , indicating that the previous growth in earnings has not been able to improve ROCE because the company now needs to employ more capital to operate the business.
ROCE for SBUX investors has declined in the last few years, however, the company still remains an attractive candidate that is capable of producing solid capital returns and a potentially strong return on investment. But don’t forget, return on capital employed is a static metric that should be looked at in conjunction with other fundamental indicators like future prospects and valuation. Without considering these fundamentals, you cannot be sure if the downward path is a signal to run, or just a blip in an otherwise solid return profile. If you’re building your portfolio and want to take a deeper look, I’ve added a few links below that will help you further evaluate SBUX or other alternatives.
- Future Outlook: What are well-informed industry analysts predicting for SBUX’s future growth? Take a look at our free research report of analyst consensus for SBUX’s outlook.
- Valuation: What is SBUX worth today? Is the stock undervalued, even if its ROCE is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether SBUX is currently mispriced by the market.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at email@example.com.