Tate & Lyle's (LON:TATE) Returns Have Hit A Wall

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after investigating Tate & Lyle (LON:TATE), we don't think it's current trends fit the mold of a multi-bagger.

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. To calculate this metric for Tate & Lyle, this is the formula:

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

0.12 = UK£223m ÷ (UK£2.5b - UK£572m) (Based on the trailing twelve months to March 2023).

Therefore, Tate & Lyle has an ROCE of 12%. In absolute terms, that's a satisfactory return, but compared to the Food industry average of 8.8% it's much better.

Check out our latest analysis for Tate & Lyle

In the above chart we have measured Tate & Lyle's 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 Tate & Lyle.

So How Is Tate & Lyle's ROCE Trending?

Things have been pretty stable at Tate & Lyle, with its capital employed and returns on that capital staying somewhat the same for the last five years. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. With that in mind, unless investment picks up again in the future, we wouldn't expect Tate & Lyle to be a multi-bagger going forward. With fewer investment opportunities, it makes sense that Tate & Lyle has been paying out a decent 33% of its earnings to shareholders. Given the business isn't reinvesting in itself, it makes sense to distribute a portion of earnings among shareholders.

What We Can Learn From Tate & Lyle's ROCE

In a nutshell, Tate & Lyle has been trudging along with the same returns from the same amount of capital over the last five years. And investors may be recognizing these trends since the stock has only returned a total of 22% to shareholders over the last five years. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

One more thing to note, we've identified 1 warning sign with Tate & Lyle and understanding it should be part of your investment process.

While Tate & Lyle 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.