Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. Although, when we looked at Saputo (TSE:SAP), it didn't seem to tick all of these boxes.
What Is Return On Capital Employed (ROCE)?
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Saputo:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.083 = CA$934m ÷ (CA$14b - CA$3.0b) (Based on the trailing twelve months to June 2024).
Thus, Saputo has an ROCE of 8.3%. Even though it's in line with the industry average of 8.3%, it's still a low return by itself.
See our latest analysis for Saputo
Above you can see how the current ROCE for Saputo compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Saputo .
What Can We Tell From Saputo's ROCE Trend?
Over the past five years, Saputo's ROCE and capital employed have both remained mostly flat. Businesses with these traits tend to be mature and steady operations because they're past the growth phase. With that in mind, unless investment picks up again in the future, we wouldn't expect Saputo to be a multi-bagger going forward. This probably explains why Saputo is paying out 41% of its income to shareholders in the form of dividends. Unless businesses have highly compelling growth opportunities, they'll typically return some money to shareholders.
What We Can Learn From Saputo's ROCE
In a nutshell, Saputo has been trudging along with the same returns from the same amount of capital over the last five years. Since the stock has declined 17% over the last five years, investors may not be too optimistic on this trend improving either. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.
Saputo does have some risks though, and we've spotted 4 warning signs for Saputo that you might be interested in.
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.
