Farm Pride Foods (ASX:FRM) Is Doing The Right Things To Multiply Its Share Price

To find a multi-bagger stock, what are the underlying trends we should look for in a business? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So on that note, Farm Pride Foods (ASX:FRM) looks quite promising in regards to its trends of return on capital.

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. Analysts use this formula to calculate it for Farm Pride Foods:

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

0.0093 = AU$219k ÷ (AU$62m - AU$38m) (Based on the trailing twelve months to December 2023).

Thus, Farm Pride Foods has an ROCE of 0.9%. Ultimately, that's a low return and it under-performs the Food industry average of 12%.

See our latest analysis for Farm Pride Foods

Historical performance is a great place to start when researching a stock so above you can see the gauge for Farm Pride Foods' ROCE against it's prior returns. If you're interested in investigating Farm Pride Foods' past further, check out this free graph covering Farm Pride Foods' past earnings, revenue and cash flow.

What Can We Tell From Farm Pride Foods' ROCE Trend?

It's great to see that Farm Pride Foods has started to generate some pre-tax earnings from prior investments. The company was generating losses five years ago, but now it's turned around, earning 0.9% which is no doubt a relief for some early shareholders. Additionally, the business is utilizing 47% less capital than it was five years ago, and taken at face value, that can mean the company needs less funds at work to get a return. Farm Pride Foods could be selling under-performing assets since the ROCE is improving.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Essentially the business now has suppliers or short-term creditors funding about 62% of its operations, which isn't ideal. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.

What We Can Learn From Farm Pride Foods' ROCE

From what we've seen above, Farm Pride Foods has managed to increase it's returns on capital all the while reducing it's capital base. And since the stock has fallen 55% over the last five years, there might be an opportunity here. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

On a final note, we found 3 warning signs for Farm Pride Foods (1 doesn't sit too well with us) you should be aware of.

While Farm Pride Foods 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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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.