Investors should not overlook favorable capital returns at Scotts Miracle-Gro (NYSE:SMG)

Did you know that there are financial metrics that can provide clues to a potential multi-bagger? Typically, we will want to notice a growth trend to return to on capital employed (ROCE) and at the same time, a based capital employed. Simply put, these types of businesses are slot machines, meaning they continually reinvest their profits at ever-higher rates of return. Therefore, when we looked at ROCE trends at Scotts Miracle-Gro (NYSE: SMG), we liked what we saw.

What is return on capital employed (ROCE)?

For those unaware, ROCE is a measure of a company’s annual pre-tax profit (yield), relative to the capital employed in the business. The formula for this calculation on Scotts Miracle-Gro is:

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

0.20 = $750 million ÷ ($4.8 billion – $1.1 billion) (Based on the last twelve months to September 2021).

So, Scotts Miracle-Gro has a 20% ROI. In absolute terms, this is an excellent return and is even better than the chemical industry average of 11%.

See our latest analysis for Scotts Miracle-Gro

Above, you can see how Scotts Miracle-Gro’s current ROCE compares to its past returns on capital, but there’s little you can say about the past. If you want to see what analysts predict for the future, you should check out our free report for Scotts Miracle-Gro.

What the ROCE trend can tell us

In terms of Scotts Miracle-Gro’s ROCE history, that’s pretty impressive. The company has consistently gained 20% over the past five years and the capital employed within the company has increased by 78% over this period. Now considering that the ROCE is an attractive 20%, this combination is actually quite attractive because it means the company can consistently put money to work and generate those high returns. If Scotts Miracle-Gro can continue like this, we would be very optimistic about its future.

Scotts Miracle-Gro ROCE Basics

In summary, we are pleased to see that Scotts Miracle-Gro has compounded returns by reinvesting at consistently high rates of return, as these are common characteristics of a multi-bagger. And since the stock has risen sharply over the past five years, it looks like the market might be expecting that trend to continue. So while the stock may be more “expensive” than it used to be, we believe the strong fundamentals warrant this stock for further research.

If you want to further research Scotts Miracle-Gro, you may be interested in learning more about the 1 warning sign that our analysis found.

If you want to find more stocks that have generated high returns, check out this free list of stocks with strong balance sheets that also generate high returns on equity.

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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.