If we want to find a stock that could multiply over the long term, what are the underlying trends we should look 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at Saputo (TSE:SAP) and its ROCE trend, we weren't exactly thrilled.
What Is Return On Capital Employed (ROCE)?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Saputo:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.085 = CA$976m ÷ (CA$14b - CA$3.0b) (Based on the trailing twelve months to March 2023).
Thus, Saputo has an ROCE of 8.5%. On its own that's a low return, but compared to the average of 6.4% generated by the Food industry, it's much better.
See our latest analysis for Saputo
In the above chart we have measured Saputo's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Saputo.
SWOT Analysis for Saputo
- Earnings growth over the past year exceeded the industry.
- Debt is well covered by earnings and cashflows.
- Dividends are covered by earnings and cash flows.
- Dividend is low compared to the top 25% of dividend payers in the Food market.
- Annual earnings are forecast to grow faster than the Canadian market.
- Good value based on P/E ratio and estimated fair value.
- Annual revenue is forecast to grow slower than the Canadian market.
What The Trend Of ROCE Can Tell Us
When we looked at the ROCE trend at Saputo, we didn't gain much confidence. To be more specific, ROCE has fallen from 15% over the last five years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.
The Bottom Line On Saputo's ROCE
Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Saputo. And there could be an opportunity here if other metrics look good too, because the stock has declined 26% in the last five years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.
On a separate note, we've found 1 warning sign for Saputo you'll probably want to know about.
While Saputo 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.
About TSX:SAP
Saputo
Produces, markets, and distributes dairy products in Canada, the United States, Argentina, Australia, and the United Kingdom.
Excellent balance sheet moderate and pays a dividend.
