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If we want to find a stock that could multiply over the long term, what are the underlying trends we should look 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after briefly looking over the numbers, we don't think Natural Grocers by Vitamin Cottage (NYSE:NGVC) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
Return On Capital Employed (ROCE): What is it?
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. Analysts use this formula to calculate it for Natural Grocers by Vitamin Cottage:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.074 = US$39m ÷ (US$655m - US$132m) (Based on the trailing twelve months to March 2022).
Thus, Natural Grocers by Vitamin Cottage has an ROCE of 7.4%. In absolute terms, that's a low return but it's around the Consumer Retailing industry average of 8.3%.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Natural Grocers by Vitamin Cottage's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Natural Grocers by Vitamin Cottage, check out these free graphs here.
What The Trend Of ROCE Can Tell Us
The returns on capital haven't changed much for Natural Grocers by Vitamin Cottage in recent years. Over the past five years, ROCE has remained relatively flat at around 7.4% and the business has deployed 137% more capital into its operations. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.
The Key Takeaway
In conclusion, Natural Grocers by Vitamin Cottage has been investing more capital into the business, but returns on that capital haven't increased. Yet to long term shareholders the stock has gifted them an incredible 134% return in the last five years, so the market appears to be rosy about its future. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.
On a separate note, we've found 2 warning signs for Natural Grocers by Vitamin Cottage you'll probably want to know about.
While Natural Grocers by Vitamin Cottage 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.