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What are the early trends we should look for to identify a stock that could multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So when we looked at Simply Good Foods (NASDAQ:SMPL) and its trend of ROCE, we really liked what we saw.
What is Return On Capital Employed (ROCE)?
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Simply Good Foods, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.10 = US$207m ÷ (US$2.1b - US$108m) (Based on the trailing twelve months to May 2022).
So, Simply Good Foods has an ROCE of 10%. That's a relatively normal return on capital, and it's around the 9.3% generated by the Food industry.
Above you can see how the current ROCE for Simply Good Foods compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Simply Good Foods.
The Trend Of ROCE
Investors would be pleased with what's happening at Simply Good Foods. Over the last five years, returns on capital employed have risen substantially to 10%. Basically the business is earning more per dollar of capital invested and in addition to that, 279% more capital is being employed now too. So we're very much inspired by what we're seeing at Simply Good Foods thanks to its ability to profitably reinvest capital.
The Bottom Line On Simply Good Foods' ROCE
All in all, it's terrific to see that Simply Good Foods is reaping the rewards from prior investments and is growing its capital base. And a remarkable 229% total return over the last five years tells us that investors are expecting more good things to come in the future. Therefore, we think it would be worth your time to check if these trends are going to continue.
If you'd like to know about the risks facing Simply Good Foods, we've discovered 2 warning signs that you should be aware of.
While Simply Good Foods 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.