Mission Produce (NASDAQ:AVO) Might Be Having Difficulty Using Its Capital Effectively

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after briefly looking over the numbers, we don't think Mission Produce (NASDAQ:AVO) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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 Mission Produce is:

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

0.0086 = US$7.1m ÷ (US$944m - US$115m) (Based on the trailing twelve months to July 2023).

So, Mission Produce has an ROCE of 0.9%. Ultimately, that's a low return and it under-performs the Food industry average of 11%.

View our latest analysis for Mission Produce

Above you can see how the current ROCE for Mission Produce compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Mission Produce here for free.

So How Is Mission Produce's ROCE Trending?

When we looked at the ROCE trend at Mission Produce, we didn't gain much confidence. Over the last four years, returns on capital have decreased to 0.9% from 14% four years ago. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

The Bottom Line On Mission Produce's ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for Mission Produce have fallen, meanwhile the business is employing more capital than it was four years ago. Long term shareholders who've owned the stock over the last three years have experienced a 33% depreciation in their investment, so it appears the market might not like these trends either. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

One more thing, we've spotted 1 warning sign facing Mission Produce 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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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.