Slowing Rates Of Return At Scotts Miracle-Gro (NYSE:SMG) Leave Little Room For Excitement

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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 Scotts Miracle-Gro (NYSE:SMG) and its ROCE trend, we weren't exactly thrilled.

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What Is 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 Scotts Miracle-Gro, this is the formula:

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

0.16 = US$399m ÷ (US$3.5b - US$1.0b) (Based on the trailing twelve months to March 2025).

So, Scotts Miracle-Gro has an ROCE of 16%. In absolute terms, that's a satisfactory return, but compared to the Chemicals industry average of 9.3% it's much better.

Check out our latest analysis for Scotts Miracle-Gro

In the above chart we have measured Scotts Miracle-Gro's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Scotts Miracle-Gro for free.

How Are Returns Trending?

Things have been pretty stable at Scotts Miracle-Gro, with its capital employed and returns on that capital staying somewhat the same for the last five years. This tells us the company isn't reinvesting in itself, so it's plausible that it's past the growth phase. So don't be surprised if Scotts Miracle-Gro doesn't end up being a multi-bagger in a few years time. This probably explains why Scotts Miracle-Gro is paying out 51% of its income to shareholders in the form of dividends. Unless businesses have highly compelling growth opportunities, they'll typically return some money to shareholders.

Our Take On Scotts Miracle-Gro's ROCE

In a nutshell, Scotts Miracle-Gro has been trudging along with the same returns from the same amount of capital over the last five years. And investors appear hesitant that the trends will pick up because the stock has fallen 50% in the last five years. Therefore based on the analysis done in this article, we don't think Scotts Miracle-Gro has the makings of a multi-bagger.

On a final note, we found 3 warning signs for Scotts Miracle-Gro (1 is significant) you should be aware of.

While Scotts Miracle-Gro 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.