Returns At Ebro Foods (BME:EBRO) Appear To Be Weighed Down

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. 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Ebro Foods (BME:EBRO), we don't think it's current trends fit the mold of a multi-bagger.

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. 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 = €262m ÷ (€4.0b - €1.2b) (Based on the trailing twelve months to March 2021).

Therefore, Ebro Foods has an ROCE of 9.2%. In absolute terms, that's a low return, but it's much better than the Food industry average of 7.6%.

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. Businesses with these traits tend to be mature and steady operations because they're 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. On top of that you'll notice that Ebro Foods has been paying out a large portion (65%) of earnings in the form of dividends to shareholders. These mature businesses typically have reliable earnings and not many places to reinvest them, so the next best option is to put the earnings into shareholders pockets.

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 29% of total assets, this reported ROCE would probably be less than9.2% because total capital employed would be higher.The 9.2% ROCE could be even lower if current liabilities weren't 29% 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.

The Key Takeaway

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 0.5% over the last five years, which potentially indicates that investors are accounting for this going forward. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

Ebro Foods does have some risks though, and we've spotted 3 warning signs for Ebro Foods that you might be interested in.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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