The Trends At Grupo Herdez. de (BMV:HERDEZ) That You Should Know About

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. Although, when we looked at Grupo Herdez. de (BMV:HERDEZ), it didn't seem to tick all of these boxes.

What is 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 Grupo Herdez. de, this is the formula:

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

0.058 = Mex$1.7b ÷ (Mex$34b - Mex$5.3b) (Based on the trailing twelve months to September 2020).

So, Grupo Herdez. de has an ROCE of 5.8%. Ultimately, that's a low return and it under-performs the Food industry average of 8.2%.

See our latest analysis for Grupo Herdez. de

In the above chart we have measured Grupo Herdez. de'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 report for Grupo Herdez. de.

What Does the ROCE Trend For Grupo Herdez. de Tell Us?

When we looked at the ROCE trend at Grupo Herdez. de, we didn't gain much confidence. Around five years ago the returns on capital were 13%, but since then they've fallen to 5.8%. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. 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.

What We Can Learn From Grupo Herdez. de's ROCE

In summary, Grupo Herdez. de is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And investors may be recognizing these trends since the stock has only returned a total of 34% to shareholders over the last five years. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

If you'd like to know more about Grupo Herdez. de, we've spotted 5 warning signs, and 1 of them is a bit unpleasant.

While Grupo Herdez. de 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. 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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