Will the Promising Trends At Del Monte Pacific (SGX:D03) Continue?

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So on that note, Del Monte Pacific (SGX:D03) looks quite promising in regards to its trends of return on capital.

Return On Capital Employed (ROCE): What is it?

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 Del Monte Pacific is:

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

0.091 = US$151m ÷ (US$2.7b - US$1.0b) (Based on the trailing twelve months to October 2020).

Thus, Del Monte Pacific has an ROCE of 9.1%. In absolute terms, that's a low return but it's around the Food industry average of 11%.

Check out our latest analysis for Del Monte Pacific

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

What Can We Tell From Del Monte Pacific's ROCE Trend?

Del Monte Pacific's ROCE growth is quite impressive. 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 161% 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

To sum it up, Del Monte Pacific is collecting higher returns from the same amount of capital, and that's impressive. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 14% to shareholders. So with that in mind, we think the stock deserves further research.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for Del Monte Pacific (of which 1 is a bit concerning!) that you should know about.

While Del Monte Pacific 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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