Slowing Rates Of Return At Cranswick (LON:CWK) Leave Little Room For Excitement

There are a few key trends to look for if we want to identify the next multi-bagger. 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. That's why when we briefly looked at Cranswick's (LON:CWK) ROCE trend, we were pretty happy with what we saw.

Understanding 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. Analysts use this formula to calculate it for Cranswick:

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

0.17 = UK£175m ÷ (UK£1.4b - UK£331m) (Based on the trailing twelve months to March 2024).

So, Cranswick has an ROCE of 17%. In absolute terms, that's a satisfactory return, but compared to the Food industry average of 12% it's much better.

See our latest analysis for Cranswick

In the above chart we have measured Cranswick's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Cranswick .

So How Is Cranswick's ROCE Trending?

While the returns on capital are good, they haven't moved much. The company has employed 88% more capital in the last five years, and the returns on that capital have remained stable at 17%. Since 17% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.

Our Take On Cranswick's ROCE

The main thing to remember is that Cranswick has proven its ability to continually reinvest at respectable rates of return. And the stock has followed suit returning a meaningful 70% to shareholders over the last five years. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.

If you'd like to know about the risks facing Cranswick, we've discovered 1 warning sign that you should be aware of.

While Cranswick may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.