Yahoo Finance Natural Grocers by Vitamin Cottage (NYSE:NGVC) Hasn't Managed To Accelerate Its Returns
What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Natural Grocers by Vitamin Cottage (NYSE:NGVC), it didn't seem to tick all of these boxes.
Understanding 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 Natural Grocers by Vitamin Cottage, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.063 = US$33m ÷ (US$663m - US$138m) (Based on the trailing twelve months to September 2022).
Thus, Natural Grocers by Vitamin Cottage has an ROCE of 6.3%. Ultimately, that's a low return and it under-performs the Consumer Retailing industry average of 9.6%.
View our latest analysis for Natural Grocers by Vitamin Cottage
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Natural Grocers by Vitamin Cottage has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
What Can We Tell From Natural Grocers by Vitamin Cottage's ROCE Trend?
There are better returns on capital out there than what we're seeing at Natural Grocers by Vitamin Cottage. The company has consistently earned 6.3% for the last five years, and the capital employed within the business has risen 130% in that time. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.
The Bottom Line
As we've seen above, Natural Grocers by Vitamin Cottage's returns on capital haven't increased but it is reinvesting in the business. Although the market must be expecting these trends to improve because the stock has gained 51% over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.
Like most companies, Natural Grocers by Vitamin Cottage does come with some risks, and we've found 1 warning sign that you should be aware of.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.
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