Returns At Sprouts Farmers Market (NASDAQ:SFM) Appear To Be Weighed Down
What are the early trends we should look for to identify a stock that could multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. That's why when we briefly looked at Sprouts Farmers Market's (NASDAQ:SFM) ROCE trend, we were pretty happy with what we saw.
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. The formula for this calculation on Sprouts Farmers Market is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.14 = US$387m ÷ (US$3.3b - US$547m) (Based on the trailing twelve months to December 2023).
So, Sprouts Farmers Market has an ROCE of 14%. On its own, that's a standard return, however it's much better than the 11% generated by the Consumer Retailing industry.
View our latest analysis for Sprouts Farmers Market
Above you can see how the current ROCE for Sprouts Farmers Market compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Sprouts Farmers Market .
How Are Returns Trending?
While the current returns on capital are decent, they haven't changed much. The company has employed 102% more capital in the last five years, and the returns on that capital have remained stable at 14%. Since 14% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.
The Bottom Line On Sprouts Farmers Market's ROCE
To sum it up, Sprouts Farmers Market has simply been reinvesting capital steadily, at those decent rates of return. And long term investors would be thrilled with the 187% return they've received over the last five years. So even though the stock might be more "expensive" than it was before, we think the strong fundamentals warrant this stock for further research.
Sprouts Farmers Market does have some risks though, and we've spotted 1 warning sign for Sprouts Farmers Market that you might be interested in.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.
