Returns On Capital Signal Tricky Times Ahead For Cranswick (LON:CWK)

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after investigating Cranswick (LON:CWK), we don't think it's current trends fit the mold of a multi-bagger.

Return On Capital Employed (ROCE): What Is It?

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 Cranswick is:

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

0.13 = UK£132m ÷ (UK£1.3b - UK£288m) (Based on the trailing twelve months to March 2023).

Therefore, Cranswick has an ROCE of 13%. In absolute terms, that's a satisfactory return, but compared to the Food industry average of 8.5% it's much better.

See our latest analysis for Cranswick

Above you can see how the current ROCE for Cranswick compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Does the ROCE Trend For Cranswick Tell Us?

In terms of Cranswick's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 18% 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. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

The Bottom Line On Cranswick's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Cranswick. In light of this, the stock has only gained 11% over the last five years. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.

If you're still interested in Cranswick it's worth checking out our FREE intrinsic value approximation to see if it's trading at an attractive price in other respects.

While Cranswick isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.