We Like These Underlying Return On Capital Trends At Foodison (TSE:7114)

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. With that in mind, we've noticed some promising trends at Foodison (TSE:7114) so let's look a bit deeper.

Understanding Return On Capital Employed (ROCE)

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. To calculate this metric for Foodison, this is the formula:

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

0.077 = JP¥196m ÷ (JP¥3.4b - JP¥877m) (Based on the trailing twelve months to March 2024).

Thus, Foodison has an ROCE of 7.7%. In absolute terms, that's a low return but it's around the Consumer Retailing industry average of 9.1%.

View our latest analysis for Foodison

In the above chart we have measured Foodison'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 analyst report for Foodison .

So How Is Foodison's ROCE Trending?

Foodison has recently broken into profitability so their prior investments seem to be paying off. About three years ago the company was generating losses but things have turned around because it's now earning 7.7% on its capital. And unsurprisingly, like most companies trying to break into the black, Foodison is utilizing 167% more capital than it was three years ago. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

The Bottom Line On Foodison's ROCE

Long story short, we're delighted to see that Foodison's reinvestment activities have paid off and the company is now profitable. Astute investors may have an opportunity here because the stock has declined 34% in the last year. So researching this company further and determining whether or not these trends will continue seems justified.

Foodison does have some risks, we noticed 4 warning signs (and 1 which is a bit unpleasant) we think you should know about.

While Foodison 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com