The Return Trends At Simply Good Foods (NASDAQ:SMPL) Look Promising

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So when we looked at Simply Good Foods (NASDAQ:SMPL) and its trend of ROCE, we really liked what we saw.

Return On Capital Employed (ROCE): What Is It?

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$201m ÷ (US$2.1b - US$120m) (Based on the trailing twelve months to May 2022).

So, Simply Good Foods has an ROCE of 10%. That's a pretty standard return and it's in line with the industry average of 9.6%.

Check out the opportunities and risks within the US Food industry.

In the above chart we have measured Simply Good Foods' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Simply Good Foods.

The Trend Of ROCE

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 182%. So we're very much inspired by what we're seeing at Simply Good Foods thanks to its ability to profitably reinvest capital.

Our Take On Simply Good Foods' ROCE

In summary, it's great to see that Simply Good Foods can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. Since the stock has returned a staggering 187% to shareholders over the last five years, it looks like investors are recognizing these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

One more thing to note, we've identified 1 warning sign with Simply Good Foods and understanding this should be part of your investment process.

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.