Eggriculture Foods' (HKG:8609) Returns On Capital Not Reflecting Well On The Business

There are a few key trends to look for if we want to identify the next multi-bagger. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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 Eggriculture Foods (HKG:8609) 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?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Eggriculture Foods:

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

0.04 = S$2.3m ÷ (S$74m - S$18m) (Based on the trailing twelve months to September 2021).

Therefore, Eggriculture Foods has an ROCE of 4.0%. In absolute terms, that's a low return and it also under-performs the Food industry average of 9.8%.

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'd like to look at how Eggriculture Foods has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Can We Tell From Eggriculture Foods' ROCE Trend?

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 4.0% from 10.0% five years ago. 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. 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. These trends don't appear to have influenced returns though, because the total return from the stock has been mostly flat over the last three years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

Eggriculture Foods does have some risks, we noticed 2 warning signs (and 1 which doesn't sit too well with us) we think you should know about.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.