Stock Analysis

Should You Be Impressed By Associated British Foods' (LON:ABF) Returns on Capital?

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LSE:ABF
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Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after briefly looking over the numbers, we don't think Associated British Foods (LON:ABF) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Return On Capital Employed (ROCE): What is it?

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 Associated British Foods is:

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

0.066 = UK£893m ÷ (UK£17b - UK£3.2b) (Based on the trailing twelve months to September 2020).

Thus, Associated British Foods has an ROCE of 6.6%. On its own, that's a low figure but it's around the 7.6% average generated by the Food industry.

View our latest analysis for Associated British Foods

roce
LSE:ABF Return on Capital Employed February 10th 2021

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.

What Can We Tell From Associated British Foods' ROCE Trend?

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. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

The Bottom Line On Associated British Foods' ROCE

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. It should come as no surprise then that the stock has fallen 23% over the last five years, so it looks like investors are recognizing these changes. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

On a final note, we've found 3 warning signs for Associated British Foods that we think you should be aware of.

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