Stock Analysis

Returns On Capital At Associated British Foods (LON:ABF) Paint A Concerning Picture

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LSE:ABF
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Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we looked at Associated British Foods (LON:ABF), it didn't seem to tick all of these boxes.

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 Associated British Foods is:

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

0.083 = UK£1.2b ÷ (UK£18b - UK£3.3b) (Based on the trailing twelve months to March 2022).

So, Associated British Foods has an ROCE of 8.3%. Ultimately, that's a low return and it under-performs the Food industry average of 11%.

View our latest analysis for Associated British Foods

roce
LSE:ABF Return on Capital Employed May 27th 2022

In the above chart we have measured Associated British Foods' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Associated British Foods.

What Does the ROCE Trend For Associated British Foods Tell Us?

In terms of Associated British Foods' historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 13% over the last five years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

What We Can Learn From Associated British Foods' ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Associated British Foods is reinvesting for growth and has higher sales as a result. These growth trends haven't led to growth returns though, since the stock has fallen 38% over the last five years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

One more thing, we've spotted 1 warning sign facing Associated British Foods that you might find interesting.

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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