If you’re looking for a multi-bagger, there’s a few things to keep an eye out for. Amongst other things, we’ll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company’s amount 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. With that in mind, the ROCE of SalMar (OB:SALM) looks attractive right now, so lets see what the trend of returns can tell us.
Return On Capital Employed (ROCE): What is it?
Just to clarify if you’re unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for SalMar:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.23 = kr3.4b ÷ (kr19b – kr4.0b) (Based on the trailing twelve months to March 2020).
Therefore, SalMar has an ROCE of 23%. In absolute terms that’s a great return and it’s even better than the Food industry average of 7.1%.
Above you can see how the current ROCE for SalMar compares to its prior returns on capital, but there’s only so much you can tell from the past. If you’re interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
What Does the ROCE Trend For SalMar Tell Us?
We’d be pretty happy with returns on capital like SalMar. Over the past five years, ROCE has remained relatively flat at around 23% and the business has deployed 80% more capital into its operations. With returns that high, it’s great that the business can continually reinvest its money at such appealing rates of return. You’ll see this when looking at well operated businesses or favorable business models.
Our Take On SalMar’s ROCE
In short, we’d argue SalMar has the makings of a multi-bagger since its been able to compound its capital at very profitable rates of return. On top of that, the stock has rewarded shareholders with a remarkable 300% return to those who’ve held over the last five years. So even though the stock might be more “expensive” than it was before, we think the strong fundamentals warrant this stock for further research.
If you want to continue researching SalMar, you might be interested to know about the 2 warning signs that our analysis has discovered.
High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.
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