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What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Having said that, from a first glance at Scotts Miracle-Gro (NYSE:SMG) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
Return On Capital Employed (ROCE): What Is It?
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. 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)
0.17 = US$365m ÷ (US$2.9b - US$750m) (Based on the trailing twelve months to September 2024).
Thus, Scotts Miracle-Gro has an ROCE of 17%. On its own, that's a standard return, however it's much better than the 8.4% generated by the Chemicals industry.
See our latest analysis for Scotts Miracle-Gro
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 to see what analysts are forecasting going forward, you should check out our free analyst report for Scotts Miracle-Gro .
What Can We Tell From Scotts Miracle-Gro's ROCE Trend?
Over the past five years, Scotts Miracle-Gro's ROCE and capital employed have both remained mostly flat. This tells us the company isn't reinvesting in itself, so it's plausible that it's past the growth phase. With that in mind, unless investment picks up again in the future, we wouldn't expect Scotts Miracle-Gro to be a multi-bagger going forward. This probably explains why Scotts Miracle-Gro is paying out 59% of its income to shareholders in the form of dividends. Given the business isn't reinvesting in itself, it makes sense to distribute a portion of earnings among shareholders.
The Bottom Line On Scotts Miracle-Gro's ROCE
In summary, Scotts Miracle-Gro isn't compounding its earnings but is generating stable returns on the same amount of capital employed. Since the stock has declined 27% over the last five years, investors may not be too optimistic on this trend improving either. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.