If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Saputo (TSE:SAP) and its ROCE trend, we weren't exactly thrilled.
Understanding 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)
0.059 = CA$654m ÷ (CA$14b - CA$2.6b) (Based on the trailing twelve months to December 2021).
Therefore, Saputo has an ROCE of 5.9%. Ultimately, that's a low return and it under-performs the Food industry average of 9.4%.
Check out 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'd like to see what analysts are forecasting going forward, you should check out our free report for Saputo.
How Are Returns Trending?
In terms of Saputo's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 5.9% from 17% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.
Our Take On Saputo's ROCE
To conclude, we've found that Saputo is reinvesting in the business, but returns have been falling. And in the last five years, the stock has given away 30% so the market doesn't look too hopeful on these trends strengthening any time soon. Therefore based on the analysis done in this article, we don't think Saputo has the makings of a multi-bagger.
If you'd like to know more about Saputo, we've spotted 2 warning signs, and 1 of them is potentially serious.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
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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.
