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. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at Groupe Minoteries (VTX:GMI) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
Understanding 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. To calculate this metric for Groupe Minoteries, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.049 = CHF5.4m ÷ (CHF130m - CHF20m) (Based on the trailing twelve months to June 2020).
Thus, Groupe Minoteries has an ROCE of 4.9%. Ultimately, that's a low return and it under-performs the Food industry average of 7.6%.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Groupe Minoteries' ROCE against it's prior returns. If you'd like to look at how Groupe Minoteries has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
So How Is Groupe Minoteries' ROCE Trending?
There hasn't been much to report for Groupe Minoteries' returns and its level of capital employed because both metrics have been steady for the past five years. This tells us the company isn't reinvesting in itself, so it's plausible that it's past the growth phase. So don't be surprised if Groupe Minoteries doesn't end up being a multi-bagger in a few years time.
The Bottom Line
In summary, Groupe Minoteries isn't compounding its earnings but is generating stable returns on the same amount of capital employed. Unsurprisingly, the stock has only gained 16% over the last five years, which potentially indicates that investors are accounting for this going forward. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.
On a final note, we've found 1 warning sign for Groupe Minoteries that we think you should be aware of.
While Groupe Minoteries 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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