Returns On Capital Are Showing Encouraging Signs At Indofood Agri Resources (SGX:5JS)

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. Speaking of which, we noticed some great changes in Indofood Agri Resources' (SGX:5JS) returns on capital, so let's have a look.

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 Indofood Agri Resources, this is the formula:

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

0.059 = Rp1.7t ÷ (Rp37t - Rp9.2t) (Based on the trailing twelve months to December 2020).

Thus, Indofood Agri Resources has an ROCE of 5.9%. Ultimately, that's a low return and it under-performs the Food industry average of 12%.

View our latest analysis for Indofood Agri Resources

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're interested in investigating Indofood Agri Resources' past further, check out this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

Indofood Agri Resources' ROCE growth is quite impressive. More specifically, while the company has kept capital employed relatively flat over the last five years, the ROCE has climbed 25% in that same time. 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.

Our Take On Indofood Agri Resources' ROCE

As discussed above, Indofood Agri Resources appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. Astute investors may have an opportunity here because the stock has declined 28% in the last five years. So researching this company further and determining whether or not these trends will continue seems justified.

One more thing, we've spotted 1 warning sign facing Indofood Agri Resources that you might find interesting.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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