If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Having said that, from a first glance at Sovos Brands (NASDAQ:SOVO) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
Understanding Return On Capital Employed (ROCE)
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Sovos Brands, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.042 = US$45m ÷ (US$1.2b - US$116m) (Based on the trailing twelve months to September 2022).
Therefore, Sovos Brands has an ROCE of 4.2%. Ultimately, that's a low return and it under-performs the Food industry average of 9.5%.
Above you can see how the current ROCE for Sovos Brands compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Sovos Brands here for free.
The Trend Of ROCE
There hasn't been much to report for Sovos Brands' returns and its level of capital employed because both metrics have been steady for the past two years. 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 Sovos Brands to be a multi-bagger going forward.
What We Can Learn From Sovos Brands' ROCE
In a nutshell, Sovos Brands has been trudging along with the same returns from the same amount of capital over the last two years. Unsurprisingly then, the total return to shareholders over the last year has been flat. Therefore based on the analysis done in this article, we don't think Sovos Brands has the makings of a multi-bagger.
If you're still interested in Sovos Brands it's worth checking out our FREE intrinsic value approximation to see if it's trading at an attractive price in other respects.
While Sovos Brands isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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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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