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Starbucks (NASDAQ:SBUX) Might Become A Compounding Machine

What trends should we look for it we want to identify stocks that can 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. With that in mind, the ROCE of Starbucks (NASDAQ:SBUX) looks attractive right now, so lets see what the trend of returns can tell us.

What Is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Starbucks is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.26 = US$5.6b ÷ (US$29b - US$7.5b) (Based on the trailing twelve months to March 2024).

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Therefore, Starbucks has an ROCE of 26%. In absolute terms that's a great return and it's even better than the Hospitality industry average of 10%.

See our latest analysis for Starbucks

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In the above chart we have measured Starbucks' 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 Starbucks .

The Trend Of ROCE

It's hard not to be impressed by Starbucks' returns on capital. The company has consistently earned 26% for the last five years, and the capital employed within the business has risen 77% in that time. With returns that high, it's great that the business can continually reinvest its money at such appealing rates of return. If Starbucks can keep this up, we'd be very optimistic about its future.

The Bottom Line On Starbucks' ROCE

In short, we'd argue Starbucks has the makings of a multi-bagger since its been able to compound its capital at very profitable rates of return. And given the stock has only risen 15% over the last five years, we'd suspect the market is beginning to recognize these trends. That's why it could be worth your time looking into this stock further to discover if it has more traits of a multi-bagger.

On a final note, we found 2 warning signs for Starbucks (1 is potentially serious) 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.