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These Return Metrics Don't Make Sanford (NZSE:SAN) Look Too Strong

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·3 min read
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When researching a stock for investment, what can tell us that the company is in decline? Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. And from a first read, things don't look too good at Sanford (NZSE:SAN), so let's see why.

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. Analysts use this formula to calculate it for Sanford:

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

0.027 = NZ$23m ÷ (NZ$958m - NZ$122m) (Based on the trailing twelve months to March 2022).

Thus, Sanford has an ROCE of 2.7%. Ultimately, that's a low return and it under-performs the Food industry average of 7.0%.

See our latest analysis for Sanford

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roce

Above you can see how the current ROCE for Sanford 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 Sanford here for free.

So How Is Sanford's ROCE Trending?

In terms of Sanford's historical ROCE movements, the trend doesn't inspire confidence. About five years ago, returns on capital were 8.2%, however they're now substantially lower than that as we saw above. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Sanford becoming one if things continue as they have.

Our Take On Sanford's ROCE

In summary, it's unfortunate that Sanford is generating lower returns from the same amount of capital. Investors haven't taken kindly to these developments, since the stock has declined 37% from where it was five years ago. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

Sanford does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is a bit unpleasant...

While Sanford 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.

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