Be Wary Of Eggriculture Foods (HKG:8609) And Its Returns On Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Eggriculture Foods (HKG:8609) and its ROCE trend, we weren't exactly thrilled.

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

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Eggriculture Foods is:

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

0.067 = S$3.0m ÷ (S$59m - S$14m) (Based on the trailing twelve months to June 2021).

Therefore, Eggriculture Foods has an ROCE of 6.7%. In absolute terms, that's a low return and it also under-performs the Food industry average of 11%.

View our latest analysis for Eggriculture Foods

Historical performance is a great place to start when researching a stock so above you can see the gauge for Eggriculture Foods' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Eggriculture Foods, check out these free graphs here.

What Does the ROCE Trend For Eggriculture Foods Tell Us?

When we looked at the ROCE trend at Eggriculture Foods, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 6.7% from 9.3% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

The Bottom Line

While returns have fallen for Eggriculture Foods in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. Despite these promising trends, the stock has collapsed 84% over the last three years, so there could be other factors hurting the company's prospects. Regardless, reinvestment can pay off in the long run, so we think astute investors may want to look further into this stock.

One more thing, we've spotted 3 warning signs facing Eggriculture 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.

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.

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