Seneca Foods (NASDAQ:SENE.A) Is Reinvesting To Multiply In Value

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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. With that in mind, the ROCE of Seneca Foods (NASDAQ:SENE.A) looks attractive right now, so lets see what the trend of returns can tell us.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Seneca Foods:

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

0.21 = US$138m ÷ (US$859m - US$188m) (Based on the trailing twelve months to December 2020).

Therefore, Seneca Foods has an ROCE of 21%. That's a fantastic return and not only that, it outpaces the average of 9.3% earned by companies in a similar 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 want to delve into the historical earnings, revenue and cash flow of Seneca Foods, check out these free graphs here.

So How Is Seneca Foods' ROCE Trending?

In terms of Seneca Foods' history of ROCE, it's quite impressive. Over the past five years, ROCE has remained relatively flat at around 21% and the business has deployed 40% more capital into its operations. Returns like this are the envy of most businesses and given it has repeatedly reinvested at these rates, that's even better. If these trends can continue, it wouldn't surprise us if the company became a multi-bagger.

One more thing to note, even though ROCE has remained relatively flat over the last five years, the reduction in current liabilities to 22% of total assets, is good to see from a business owner's perspective. Effectively suppliers now fund less of the business, which can lower some elements of risk.

Our Take On Seneca Foods' ROCE

In the end, the company has proven it can reinvest it's capital at high rates of returns, which you'll remember is a trait of a multi-bagger. And the stock has followed suit returning a meaningful 54% to shareholders over the last five years. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.

Like most companies, Seneca Foods does come with some risks, and we've found 2 warning signs that you should be aware of.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.

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