Return Trends At Barry Callebaut (VTX:BARN) Aren't Appealing

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. 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 Barry Callebaut (VTX:BARN) and its ROCE trend, we weren't exactly thrilled.

What is 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. Analysts use this formula to calculate it for Barry Callebaut:

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

0.098 = CHF487m ÷ (CHF7.4b - CHF2.5b) (Based on the trailing twelve months to February 2021).

Thus, Barry Callebaut has an ROCE of 9.8%. On its own that's a low return, but compared to the average of 7.6% generated by the Food industry, it's much better.

Check out our latest analysis for Barry Callebaut

In the above chart we have measured Barry Callebaut's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

The Trend Of ROCE

In terms of Barry Callebaut's historical ROCE trend, it doesn't exactly demand attention. The company has consistently earned 9.8% for the last five years, and the capital employed within the business has risen 52% in that time. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

The Key Takeaway

In summary, Barry Callebaut has simply been reinvesting capital and generating the same low rate of return as before. Since the stock has gained an impressive 81% over the last five years, investors must think there's better things to come. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

Barry Callebaut does have some risks though, and we've spotted 1 warning sign for Barry Callebaut that you might be interested in.

While Barry Callebaut 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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This article by Simply Wall St is general in nature. 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.
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