What trends should we look for it we want to identify stocks that can multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. This shows us that it’s a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Speaking of which, we noticed some great changes in Food Empire Holdings’ (SGX:F03) returns on capital, so let’s have a look.
Understanding 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. To calculate this metric for Food Empire Holdings, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.13 = US$32m ÷ (US$295m – US$52m) (Based on the trailing twelve months to June 2020).
So, Food Empire Holdings has an ROCE of 13%. On its own, that’s a standard return, however it’s much better than the 9.8% generated by the Food industry.
Above you can see how the current ROCE for Food Empire Holdings compares to its prior returns on capital, but there’s only so much you can tell from the past. If you’d like to see what analysts are forecasting going forward, you should check out our free report for Food Empire Holdings.
What The Trend Of ROCE Can Tell Us
The trends we’ve noticed at Food Empire Holdings are quite reassuring. The data shows that returns on capital have increased substantially over the last five years to 13%. The amount of capital employed has increased too, by 41%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that’s why we’re impressed.
Our Take On Food Empire Holdings’ ROCE
A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that’s what Food Empire Holdings has. And a remarkable 163% total return over the last five years tells us that investors are expecting more good things to come in the future. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.
On the other side of ROCE, we have to consider valuation. That’s why we have a FREE intrinsic value estimation on our platform that is definitely worth checking out.
While Food Empire Holdings may not currently earn the highest returns, we’ve compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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This article by Simply Wall St is general in nature. 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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