Starbucks (NASDAQ:SBUX) Looks To Prolong Its Impressive Returns

What trends should we look for it we want to identify stocks that can 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. That's why when we briefly looked at Starbucks' (NASDAQ:SBUX) ROCE trend, we were very happy with what we saw.

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. Analysts use this formula to calculate it for Starbucks:

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

0.29 = US$5.8b ÷ (US$29b - US$9.4b) (Based on the trailing twelve months to December 2023).

Thus, Starbucks has an ROCE of 29%. In absolute terms that's a great return and it's even better than the Hospitality industry average of 9.5%.

View our latest analysis for Starbucks

roce

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 .

So How Is Starbucks' ROCE Trending?

We'd be pretty happy with returns on capital like Starbucks. The company has employed 36% more capital in the last five years, and the returns on that capital have remained stable at 29%. Now considering ROCE is an attractive 29%, this combination is actually pretty appealing because it means the business can consistently put money to work and generate these high returns. If Starbucks can keep this up, we'd be very optimistic about its future.

Our Take On Starbucks' ROCE

In summary, we're delighted to see that Starbucks has been compounding returns by reinvesting at consistently high rates of return, as these are common traits of a multi-bagger. And given the stock has only risen 25% over the last five years, we'd suspect the market is beginning to recognize these trends. So to determine if Starbucks is a multi-bagger going forward, we'd suggest digging deeper into the company's other fundamentals.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for Starbucks (of which 1 is concerning!) that you should know about.

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.

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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.