What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Mowi (OB:MOWI) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
What Is Return On Capital Employed (ROCE)?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Mowi is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.17 = €945m ÷ (€6.8b - €1.3b) (Based on the trailing twelve months to September 2022).
Thus, Mowi has an ROCE of 17%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Food industry average of 15%.
Check out the opportunities and risks within the NO Food industry.
Above you can see how the current ROCE for Mowi compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
What Does the ROCE Trend For Mowi Tell Us?
On the surface, the trend of ROCE at Mowi doesn't inspire confidence. Around five years ago the returns on capital were 25%, but since then they've fallen to 17%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.
What We Can Learn From Mowi's 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 Mowi. In light of this, the stock has only gained 26% over the last five years. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.
Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for Mowi (of which 1 is significant!) that you should know about.
While Mowi 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.
About OB:MOWI
Mowi
A seafood company, farms, produces, and supplies Atlantic salmon products worldwide.
Good value with adequate balance sheet and pays a dividend.
