Investors Will Want Simply Good Foods' (NASDAQ:SMPL) Growth In ROCE To Persist

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. So on that note, Simply Good Foods (NASDAQ:SMPL) looks quite promising in regards to its trends of return on capital.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Simply Good Foods, this is the formula:

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

0.10 = US$208m ÷ (US$2.1b - US$79m) (Based on the trailing twelve months to November 2023).

Thus, Simply Good Foods has an ROCE of 10%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Food industry average of 11%.

Check out our latest analysis for Simply Good Foods

Above you can see how the current ROCE for Simply Good Foods compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Simply Good Foods for free.

What The Trend Of ROCE Can Tell Us

Investors would be pleased with what's happening at Simply Good Foods. Over the last five years, returns on capital employed have risen substantially to 10%. The amount of capital employed has increased too, by 93%. So we're very much inspired by what we're seeing at Simply Good Foods thanks to its ability to profitably reinvest capital.

What We Can Learn From Simply Good Foods' ROCE

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Simply Good Foods has. And with a respectable 74% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

While Simply Good Foods looks impressive, no company is worth an infinite price. The intrinsic value infographic for SMPL helps visualize whether it is currently trading for a fair price.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.