Some Investors May Be Worried About Food & Life Companies' (TSE:3563) Returns On Capital

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at Food & Life Companies (TSE:3563) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What Is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Food & Life Companies, this is the formula:

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

0.089 = JP¥25b ÷ (JP¥360b - JP¥76b) (Based on the trailing twelve months to June 2024).

So, Food & Life Companies has an ROCE of 8.9%. On its own, that's a low figure but it's around the 9.8% average generated by the Hospitality industry.

See our latest analysis for Food & Life Companies

Above you can see how the current ROCE for Food & Life Companies compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Food & Life Companies for free.

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at Food & Life Companies, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 8.9% from 14% 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 On Food & Life Companies' ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Food & Life Companies. Furthermore the stock has climbed 65% over the last five years, it would appear that investors are upbeat about the future. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

Like most companies, Food & Life Companies does come with some risks, and we've found 2 warning signs that you should be aware of.

While Food & Life Companies 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.