Investors Will Want Fonterra Co-operative Group's (NZSE:FCG) Growth In ROCE To Persist

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. 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. Speaking of which, we noticed some great changes in Fonterra Co-operative Group's (NZSE:FCG) returns on capital, so let's have a look.

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Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Fonterra Co-operative Group:

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

0.14 = NZ$1.7b ÷ (NZ$20b - NZ$8.0b) (Based on the trailing twelve months to January 2025).

Therefore, Fonterra Co-operative Group has an ROCE of 14%. On its own, that's a standard return, however it's much better than the 9.6% generated by the Food industry.

See our latest analysis for Fonterra Co-operative Group

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Fonterra Co-operative Group has performed in the past in other metrics, you can view this free graph of Fonterra Co-operative Group's past earnings, revenue and cash flow.

What Does the ROCE Trend For Fonterra Co-operative Group Tell Us?

Fonterra Co-operative Group is showing promise given that its ROCE is trending up and to the right. Looking at the data, we can see that even though capital employed in the business has remained relatively flat, the ROCE generated has risen by 57% over the last five years. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.

The Bottom Line On Fonterra Co-operative Group's ROCE

In summary, we're delighted to see that Fonterra Co-operative Group has been able to increase efficiencies and earn higher rates of return on the same amount of capital. And a remarkable 115% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if Fonterra Co-operative Group can keep these trends up, it could have a bright future ahead.

Fonterra Co-operative Group does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is concerning...

While Fonterra Co-operative Group 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.