Returns On Capital - An Important Metric For ADM Hamburg (FRA:OEL)

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. Speaking of which, we noticed some great changes in ADM Hamburg's (FRA:OEL) returns on capital, so let's have a look.

Return On Capital Employed (ROCE): What is it?

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. The formula for this calculation on ADM Hamburg is:

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

0.064 = €12m ÷ (€186m - €4.5m) (Based on the trailing twelve months to June 2020).

Therefore, ADM Hamburg has an ROCE of 6.4%. In absolute terms, that's a low return and it also under-performs the Food industry average of 8.3%.

View our latest analysis for ADM Hamburg

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of ADM Hamburg, check out these free graphs here.

What Can We Tell From ADM Hamburg's ROCE Trend?

Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 6.4%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 46%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

One more thing to note, ADM Hamburg has decreased current liabilities to 2.4% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. So this improvement in ROCE has come from the business' underlying economics, which is great to see.

The Bottom Line On ADM Hamburg's ROCE

To sum it up, ADM Hamburg has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Considering the stock has delivered 10% to its stockholders over the last five years, it may be fair to think that investors aren't fully aware of the promising trends yet. So with that in mind, we think the stock deserves further research.

Like most companies, ADM Hamburg does come with some risks, and we've found 1 warning sign that you should be aware of.

While ADM Hamburg 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. 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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