If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, we've noticed some promising trends at SunOpta (NASDAQ:STKL) so let's look a bit deeper.
Understanding Return On Capital Employed (ROCE)
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for SunOpta:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.068 = US$35m ÷ (US$672m - US$154m) (Based on the trailing twelve months to March 2024).
So, SunOpta has an ROCE of 6.8%. In absolute terms, that's a low return and it also under-performs the Food industry average of 11%.
In the above chart we have measured SunOpta's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for SunOpta .
What Can We Tell From SunOpta's ROCE Trend?
SunOpta is showing promise given that its ROCE is trending up and to the right. The figures show that over the last five years, ROCE has grown 313% whilst employing roughly the same amount of capital. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.
One more thing to note, SunOpta has decreased current liabilities to 23% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. This tells us that SunOpta has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.
What We Can Learn From SunOpta's ROCE
As discussed above, SunOpta appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 33% to shareholders. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.
SunOpta does have some risks though, and we've spotted 2 warning signs for SunOpta that you might be interested in.
While SunOpta 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.
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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.