What trends should we look for it we want to identify stocks that can 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So on that note, Simply Good Foods (NASDAQ:SMPL) looks quite promising in regards to its trends of return on capital.
Return On Capital Employed (ROCE): What Is It?
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$208m ÷ (US$2.1b - US$90m) (Based on the trailing twelve months to August 2023).
Thus, Simply Good Foods has an ROCE of 10%. That's a relatively normal return on capital, and it's around the 11% generated by the Food industry.
View our latest analysis for Simply Good Foods
In the above chart we have measured Simply Good Foods' 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 Simply Good Foods here for free.
What The Trend Of ROCE Can Tell Us
The trends we've noticed at Simply Good Foods are quite reassuring. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 10%. Basically the business is earning more per dollar of capital invested and in addition to that, 112% more capital is being employed now too. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.
Our Take On Simply Good Foods' ROCE
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 Simply Good Foods has. Since the stock has returned a staggering 104% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it's worth looking further into this stock because if Simply Good Foods can keep these trends up, it could have a bright future ahead.
On the other side of ROCE, we have to consider valuation. That's why we have a FREE intrinsic value estimation on our platform that is definitely worth checking out.
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.