Investors Will Want Ebro Foods' (BME:EBRO) Growth In ROCE To Persist

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, we've noticed some promising trends at Ebro Foods (BME:EBRO) so let's look a bit deeper.

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. The formula for this calculation on Ebro Foods is:

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

0.092 = €277m ÷ (€3.9b - €933m) (Based on the trailing twelve months to June 2023).

Thus, Ebro Foods has an ROCE of 9.2%. On its own that's a low return on capital but it's in line with the industry's average returns of 9.4%.

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?

Ebro Foods is showing promise given that its ROCE is trending up and to the right. The figures show that over the last five years, ROCE has grown 24% whilst employing roughly the same amount of capital. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.

What We Can Learn From Ebro Foods' ROCE

In summary, we're delighted to see that Ebro Foods has been able to increase efficiencies and earn higher rates of return on the same amount of capital. Since the stock has only returned 17% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.

If you want to continue researching Ebro Foods, you might be interested to know about the 1 warning sign that our analysis has discovered.

While Ebro Foods 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. 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.