Capital Allocation Trends At Mission Produce (NASDAQ:AVO) Aren't Ideal

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Mission Produce (NASDAQ:AVO), it didn't seem to tick all of these boxes.

What is Return On Capital Employed (ROCE)?

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. To calculate this metric for Mission Produce, this is the formula:

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

0.046 = US$35m ÷ (US$881m - US$115m) (Based on the trailing twelve months to January 2022).

Thus, Mission Produce has an ROCE of 4.6%. Ultimately, that's a low return and it under-performs the Food industry average of 9.9%.

Check out our latest analysis for Mission Produce

In the above chart we have measured Mission Produce's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Mission Produce.

What Does the ROCE Trend For Mission Produce Tell Us?

When we looked at the ROCE trend at Mission Produce, we didn't gain much confidence. To be more specific, ROCE has fallen from 7.3% over the last three years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

Our Take On Mission Produce's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Mission Produce. And there could be an opportunity here if other metrics look good too, because the stock has declined 31% in the last year. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

If you'd like to know about the risks facing Mission Produce, we've discovered 1 warning sign that you should be aware of.

While Mission Produce 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. 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.