Ebro Foods (BME:EBRO) Has Some Way To Go To Become A Multi-Bagger

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after briefly looking over the numbers, we don't think Ebro Foods (BME:EBRO) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What is 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. Analysts use this formula to calculate it for Ebro Foods:

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

0.091 = €262m ÷ (€4.2b - €1.3b) (Based on the trailing twelve months to September 2021).

Thus, Ebro Foods has an ROCE of 9.1%. On its own that's a low return, but compared to the average of 4.8% generated by the Food industry, it's much better.

See our latest analysis for Ebro Foods

In the above chart we have measured Ebro Foods' prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Ebro Foods here for free.

How Are Returns Trending?

There hasn't been much to report for Ebro Foods' 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. With that in mind, unless investment picks up again in the future, we wouldn't expect Ebro Foods to be a multi-bagger going forward. This probably explains why Ebro Foods is paying out 53% of its income to shareholders in the form of dividends. Given the business isn't reinvesting in itself, it makes sense to distribute a portion of earnings among shareholders.

Another point to note, we noticed the company has increased current liabilities over the last five years. This is intriguing because if current liabilities hadn't increased to 31% of total assets, this reported ROCE would probably be less than9.1% because total capital employed would be higher.The 9.1% ROCE could be even lower if current liabilities weren't 31% of total assets, because the the formula would show a larger base of total capital employed. So while current liabilities isn't high right now, keep an eye out in case it increases further, because this can introduce some elements of risk.

What We Can Learn From Ebro Foods' ROCE

In summary, Ebro Foods isn't compounding its earnings but is generating stable returns on the same amount of capital employed. Unsurprisingly, the stock has only gained 7.5% over the last five years, which potentially indicates that investors are accounting for this going forward. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

If you want to continue researching Ebro Foods, you might be interested to know about the 2 warning signs that our analysis has discovered.

While Ebro Foods 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. 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.