What trends should we look for it we want to identify stocks that can multiply in value over the long term? Typically, we’ll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after briefly looking over the numbers, we don’t think Seaboard (NYSEMKT:SEB) has the makings of a multi-bagger going forward, but let’s have a look at why that may be.
What is Return On Capital Employed (ROCE)?
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. The formula for this calculation on Seaboard is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.031 = US$150m ÷ (US$5.9b – US$1.0b) (Based on the trailing twelve months to June 2020).
Therefore, Seaboard has an ROCE of 3.1%. Ultimately, that’s a low return and it under-performs the Food industry average of 8.3%.
View our latest analysis for Seaboard
Historical performance is a great place to start when researching a stock so above you can see the gauge for Seaboard’s ROCE against it’s prior returns. If you want to delve into the historical earnings, revenue and cash flow of Seaboard, check out these free graphs here.
So How Is Seaboard’s ROCE Trending?
When we looked at the ROCE trend at Seaboard, we didn’t gain much confidence. Over the last five years, returns on capital have decreased to 3.1% from 9.4% five years ago. However it looks like Seaboard might be reinvesting for long term growth because while capital employed has increased, the company’s sales haven’t changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.
The Key Takeaway
Bringing it all together, while we’re somewhat encouraged by Seaboard’s reinvestment in its own business, we’re aware that returns are shrinking. Additionally, the stock’s total return to shareholders over the last five years has been flat, which isn’t too surprising. All in all, the inherent trends aren’t typical of multi-baggers, so if that’s what you’re after, we think you might have more luck elsewhere.
If you’d like to know more about Seaboard, we’ve spotted 3 warning signs, and 1 of them doesn’t sit too well with us.
While Seaboard 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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