Here's What To Make Of MEGMILK SNOW BRANDLtd's (TSE:2270) Decelerating Rates Of Return

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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 MEGMILK SNOW BRANDLtd (TSE:2270) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding 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 MEGMILK SNOW BRANDLtd, this is the formula:

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

0.06 = JP¥19b ÷ (JP¥429b - JP¥115b) (Based on the trailing twelve months to June 2024).

Thus, MEGMILK SNOW BRANDLtd has an ROCE of 6.0%. On its own, that's a low figure but it's around the 7.0% average generated by the Food industry.

Check out our latest analysis for MEGMILK SNOW BRANDLtd

In the above chart we have measured MEGMILK SNOW BRANDLtd's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for MEGMILK SNOW BRANDLtd .

What The Trend Of ROCE Can Tell Us

There are better returns on capital out there than what we're seeing at MEGMILK SNOW BRANDLtd. The company has employed 30% more capital in the last five years, and the returns on that capital have remained stable at 6.0%. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

Our Take On MEGMILK SNOW BRANDLtd's ROCE

In conclusion, MEGMILK SNOW BRANDLtd has been investing more capital into the business, but returns on that capital haven't increased. Unsurprisingly, the stock has only gained 14% over the last five years, which potentially indicates that investors are accounting for this going forward. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

One final note, you should learn about the 3 warning signs we've spotted with MEGMILK SNOW BRANDLtd (including 1 which can't be ignored) .

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.

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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.