Does Ceres Global Ag (TSE:CRP) Have The Makings Of A Multi-Bagger?

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. So on that note, Ceres Global Ag (TSE:CRP) 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. The formula for this calculation on Ceres Global Ag is:

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

0.036 = US$6.3m ÷ (US$270m - US$93m) (Based on the trailing twelve months to September 2020).

Thus, Ceres Global Ag has an ROCE of 3.6%. Ultimately, that's a low return and it under-performs the Commercial Services industry average of 8.3%.

See our latest analysis for Ceres Global Ag

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of Ceres Global Ag, check out these free graphs here.

What Does the ROCE Trend For Ceres Global Ag Tell Us?

We're delighted to see that Ceres Global Ag is reaping rewards from its investments and has now broken into profitability. The company was generating losses five years ago, but has managed to turn it around and as we saw earlier is now earning 3.6%, which is always encouraging. While returns have increased, the amount of capital employed by Ceres Global Ag has remained flat over the period. With no noticeable increase in capital employed, it's worth knowing what the company plans on doing going forward in regards to reinvesting and growing the business. Because in the end, a business can only get so efficient.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 34%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books.

The Key Takeaway

In summary, we're delighted to see that Ceres Global Ag has been able to increase efficiencies and earn higher rates of return on the same amount of capital. Given the stock has declined 22% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. With that in mind, we believe the promising trends warrant this stock for further investigation.

On a final note, we found 3 warning signs for Ceres Global Ag (1 is significant) you should be aware of.

While Ceres Global Ag 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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