Associated British Foods (LON:ABF) Might Be Having Difficulty Using Its Capital Effectively

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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Associated British Foods (LON:ABF) and its ROCE trend, we weren't exactly thrilled.

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 Associated British Foods:

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

0.043 = UK£581m ÷ (UK£16b - UK£2.7b) (Based on the trailing twelve months to February 2021).

Therefore, Associated British Foods has an ROCE of 4.3%. In absolute terms, that's a low return and it also under-performs the Food industry average of 8.5%.

Check out our latest analysis for Associated British Foods

Above you can see how the current ROCE for Associated British Foods compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Associated British Foods.

So How Is Associated British Foods' ROCE Trending?

When we looked at the ROCE trend at Associated British Foods, we didn't gain much confidence. Around five years ago the returns on capital were 12%, but since then they've fallen to 4.3%. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

The Bottom Line

We're a bit apprehensive about Associated British Foods because despite more capital being deployed in the business, returns on that capital and sales have both fallen. In spite of that, the stock has delivered a 3.1% return to shareholders who held over the last five years. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

On a final note, we've found 1 warning sign for Associated British Foods that we think you should be aware of.

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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