Course 404: Aggressive-Growth Stocks
How Much Does the Company Earn on Its Capital?
In this course
1 Introduction
2 Is Cash Flow in Line with Earnings?
3 Has Growth Hurt the Balance Sheet?
4 What Are the Trends in Growth Rates?
5 How Consistent Is the Company's Growth?
6 Are Free Cash Flows Positive or Negative?
7 How Much Does the Company Earn on Its Capital?
8 How Has the Stock Performed?
9 How Expensive Is It?
10 How Does the PEG Ratio Compare with Those of Similar Firms?
11 Conclusion: Knowing the Odds

If a company earns high returns on its capital, negative free cash flow makes a lot of sense--the more spent the better. The company is investing lots of money in the business, but it's earning a high return on that investment. Starbucks' historical returns on equity (ROEs), however, fall well below the averages for both the S&P 500 and the aggressive-growth group. These low ROEs result mainly from Starbucks' thin net margins, which are a fraction of the S&P 500's--Starbucks earns just $0.06 for every dollar of revenues. These low returns on capital show that Starbucks is still something of an unproven commodity. It's funneling large sums into new stores, but has yet to show that these investments can earn a good return.

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