Seneca Foods (NASDAQ:SENE.A) Is Doing The Right Things To Multiply Its Share Price

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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, Seneca Foods (NASDAQ:SENE.A) looks quite promising in regards to its trends of return on capital.

Understanding Return On Capital Employed (ROCE)

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

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

0.082 = US$67m ÷ (US$1.0b - US$216m) (Based on the trailing twelve months to July 2022).

So, Seneca Foods has an ROCE of 8.2%. On its own, that's a low figure but it's around the 9.8% average generated by the Food industry.

Check out our latest analysis for Seneca Foods

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

What The Trend Of ROCE Can Tell Us

Seneca Foods is showing promise given that its ROCE is trending up and to the right. The figures show that over the last five years, ROCE has grown 127% whilst employing roughly the same amount of capital. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.

What We Can Learn From Seneca Foods' ROCE

As discussed above, Seneca Foods appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 57% return over the last five years. In light of that, we think it's worth looking further into this stock because if Seneca Foods can keep these trends up, it could have a bright future ahead.

Like most companies, Seneca Foods does come with some risks, and we've found 1 warning sign that you should be aware of.

While Seneca 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. 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.