Barry Callebaut's (VTX:BARN) Returns Have Hit A Wall
What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. That's why when we briefly looked at Barry Callebaut's (VTX:BARN) ROCE trend, we were pretty happy with what we saw.
Understanding Return On Capital Employed (ROCE)
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Barry Callebaut, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.14 = CHF649m ÷ (CHF7.8b - CHF3.1b) (Based on the trailing twelve months to August 2022).
Therefore, Barry Callebaut has an ROCE of 14%. That's a relatively normal return on capital, and it's around the 13% generated by the Food industry.
See our latest analysis for Barry Callebaut
Above you can see how the current ROCE for Barry Callebaut 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 report on analyst forecasts for the company.
What Can We Tell From Barry Callebaut's ROCE Trend?
The trend of ROCE doesn't stand out much, but returns on a whole are decent. The company has consistently earned 14% for the last five years, and the capital employed within the business has risen 30% in that time. 14% is a pretty standard return, and it provides some comfort knowing that Barry Callebaut has consistently earned this amount. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.
On a separate but related note, it's important to know that Barry Callebaut has a current liabilities to total assets ratio of 40%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.
Our Take On Barry Callebaut's ROCE
In the end, Barry Callebaut has proven its ability to adequately reinvest capital at good rates of return. And given the stock has only risen 9.8% over the last five years, we'd suspect the market is beginning to recognize these trends. So because of the trends we're seeing, we'd recommend looking further into this stock to see if it has the makings of a multi-bagger.
While Barry Callebaut doesn't shine too bright in this respect, it's still worth seeing if the company is trading at attractive prices. You can find that out with our FREE intrinsic value estimation on our platform.
While Barry Callebaut 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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Find out whether Barry Callebaut is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.View the Free Analysis
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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.
Barry Callebaut AG, together with its subsidiaries, engages in the manufacture and sale of chocolate and cocoa products.
Flawless balance sheet average dividend payer.