Returns Are Gaining Momentum At Flavor Full Foods (GTSM:1260)

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. So on that note, Flavor Full Foods (GTSM:1260) looks quite promising in regards to its trends of return on capital.

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

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. The formula for this calculation on Flavor Full Foods is:

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

0.071 = NT$157m ÷ (NT$3.8b - NT$1.5b) (Based on the trailing twelve months to December 2020).

So, Flavor Full Foods has an ROCE of 7.1%. Ultimately, that's a low return and it under-performs the Food industry average of 8.9%.

Check out 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're interested in investigating Flavor Full Foods' past further, check out this free graph of past earnings, revenue and cash flow.

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 data shows that returns on capital have increased substantially over the last five years to 7.1%. The amount of capital employed has increased too, by 34%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

On a separate but related note, it's important to know that Flavor Full Foods has a current liabilities to total assets ratio of 41%, 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...

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Flavor Full Foods has. Since the stock has only returned 13% 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'd like to know more about Flavor Full Foods, we've spotted 4 warning signs, and 2 of them can't be ignored.

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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