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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. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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. So when we looked at the ROCE trend of Scotts Miracle-Gro (NYSE:SMG) we really liked what we saw.
Understanding Return On Capital Employed (ROCE)
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 Scotts Miracle-Gro:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.24 = US$717m ÷ (US$4.0b - US$1.1b) (Based on the trailing twelve months to January 2021).
So, Scotts Miracle-Gro has an ROCE of 24%. That's a fantastic return and not only that, it outpaces the average of 7.1% earned by companies in a similar industry.
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, you can check out the forecasts from the analysts covering Scotts Miracle-Gro here for free.
So How Is Scotts Miracle-Gro's ROCE Trending?
We like the trends that we're seeing from Scotts Miracle-Gro. The data shows that returns on capital have increased substantially over the last five years to 24%. The amount of capital employed has increased too, by 29%. So we're very much inspired by what we're seeing at Scotts Miracle-Gro thanks to its ability to profitably reinvest capital.
The Key Takeaway
A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Scotts Miracle-Gro has. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. Therefore, we think it would be worth your time to check if these trends are going to continue.
On a final note, we've found 2 warning signs for Scotts Miracle-Gro that we think you should be aware of.
If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.
This article by Simply Wall St is general in nature. 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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