There Are Reasons To Feel Uneasy About Scotts Miracle-Gro's (NYSE:SMG) Returns On Capital

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at Scotts Miracle-Gro (NYSE:SMG) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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 Scotts Miracle-Gro, this is the formula:

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

0.13 = US$421m ÷ (US$4.3b - US$964m) (Based on the trailing twelve months to September 2022).

Thus, Scotts Miracle-Gro has an ROCE of 13%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Chemicals industry average of 12%.

View 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 to see what analysts are forecasting going forward, you should check out our free report for Scotts Miracle-Gro.

How Are Returns Trending?

When we looked at the ROCE trend at Scotts Miracle-Gro, we didn't gain much confidence. To be more specific, ROCE has fallen from 19% over the last five years. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

Our Take On Scotts Miracle-Gro's ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for Scotts Miracle-Gro have fallen, meanwhile the business is employing more capital than it was five years ago. It should come as no surprise then that the stock has fallen 35% over the last five years, so it looks like investors are recognizing these changes. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

If you want to know some of the risks facing Scotts Miracle-Gro we've found 3 warning signs (2 can't be ignored!) that you should be aware of before investing here.

While Scotts Miracle-Gro may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.