Can Flavor Full Foods (GTSM:1260) Continue To Grow Its Returns On Capital?

There are a few key trends to look for if we want to identify the next multi-bagger. 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 Flavor Full Foods' (GTSM:1260) returns on capital, so let's have a look.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Flavor Full Foods, this is the formula:

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

0.042 = NT$88m ÷ (NT$3.5b - NT$1.4b) (Based on the trailing twelve months to June 2020).

Therefore, Flavor Full Foods has an ROCE of 4.2%. In absolute terms, that's a low return and it also under-performs the Food industry average of 8.5%.

View our latest analysis for Flavor Full Foods

Historical performance is a great place to start when researching a stock so above you can see the gauge for Flavor Full Foods' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Flavor Full Foods, check out these free graphs here.

What Can We Tell From Flavor Full Foods' ROCE Trend?

While in absolute terms it isn't a high ROCE, it's promising to see that it has been moving in the right direction. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 4.2%. The amount of capital employed has increased too, by 27%. So we're very much inspired by what we're seeing at Flavor Full Foods thanks to its ability to profitably reinvest capital.

On a separate but related note, it's important to know that Flavor Full Foods has a current liabilities to total assets ratio of 40%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

In Conclusion...

In summary, it's great to see that Flavor Full Foods can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. Since the stock has only returned 35% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.

If you want to know some of the risks facing Flavor Full Foods we've found 5 warning signs (2 can't be ignored!) that you should be aware of before investing here.

While Flavor Full Foods 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. 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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