The Returns At Ebro Foods (BME:EBRO) Provide Us With Signs Of What's To Come

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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Although, when we looked at Ebro Foods (BME:EBRO), it didn't seem to tick all of these boxes.

What is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed 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)

0.09 = €314m ÷ (€4.4b - €960m) (Based on the trailing twelve months to September 2020).

So, Ebro Foods has an ROCE of 9.0%. On its own, that's a low figure but it's around the 8.2% average generated by the Food industry.

See our latest analysis for Ebro Foods

Above you can see how the current ROCE for Ebro Foods compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Ebro Foods here for free.

What Can We Tell From Ebro Foods' ROCE Trend?

The returns on capital haven't changed much for Ebro Foods in recent years. Over the past five years, ROCE has remained relatively flat at around 9.0% and the business has deployed 32% more capital into its operations. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

Our Take On Ebro Foods' ROCE

As we've seen above, Ebro Foods' returns on capital haven't increased but it is reinvesting in the business. Unsurprisingly, the stock has only gained 25% 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.

Ebro Foods does have some risks though, and we've spotted 2 warning signs for Ebro Foods that you might be interested in.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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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