Returns On Capital Signal Tricky Times Ahead For Sempio Foods (KRX:248170)

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we looked at Sempio Foods (KRX:248170), it didn't seem to tick all of these boxes.

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. The formula for this calculation on Sempio Foods is:

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

0.04 = ₩9.7b ÷ (₩372b - ₩127b) (Based on the trailing twelve months to March 2024).

Thus, Sempio Foods has an ROCE of 4.0%. Ultimately, that's a low return and it under-performs the Food industry average of 7.1%.

View our latest analysis for Sempio Foods

Historical performance is a great place to start when researching a stock so above you can see the gauge for Sempio Foods' ROCE against it's prior returns. If you'd like to look at how Sempio Foods has performed in the past in other metrics, you can view this free graph of Sempio Foods' past earnings, revenue and cash flow.

What Can We Tell From Sempio Foods' ROCE Trend?

In terms of Sempio Foods' historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 15%, but since then they've fallen to 4.0%. However it looks like Sempio Foods might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a side note, Sempio Foods' current liabilities have increased over the last five years to 34% of total assets, effectively distorting the ROCE to some degree. Without this increase, it's likely that ROCE would be even lower than 4.0%. While the ratio isn't currently too high, it's worth keeping an eye on this because if it gets particularly high, the business could then face some new elements of risk.

What We Can Learn From Sempio Foods' ROCE

To conclude, we've found that Sempio Foods is reinvesting in the business, but returns have been falling. Unsurprisingly, the stock has only gained 9.3% over the last five years, which potentially indicates that investors are accounting for this going forward. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

Sempio Foods does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is significant...

While Sempio Foods 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.

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