Investors Met With Slowing Returns on Capital At Archer-Daniels-Midland (NYSE:ADM)

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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at Archer-Daniels-Midland (NYSE:ADM) and its ROCE trend, we weren't exactly thrilled.

We've discovered 2 warning signs about Archer-Daniels-Midland. View them for free.

What Is 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. The formula for this calculation on Archer-Daniels-Midland is:

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

0.06 = US$2.0b ÷ (US$53b - US$20b) (Based on the trailing twelve months to December 2024).

Thus, Archer-Daniels-Midland has an ROCE of 6.0%. Ultimately, that's a low return and it under-performs the Food industry average of 11%.

Check out our latest analysis for Archer-Daniels-Midland

Above you can see how the current ROCE for Archer-Daniels-Midland 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 Archer-Daniels-Midland for free.

How Are Returns Trending?

Things have been pretty stable at Archer-Daniels-Midland, with its capital employed and returns on that capital staying somewhat the same for the last five years. Businesses with these traits tend to be mature and steady operations because they're past the growth phase. So don't be surprised if Archer-Daniels-Midland doesn't end up being a multi-bagger in a few years time. This probably explains why Archer-Daniels-Midland is paying out 45% of its income to shareholders in the form of dividends. Unless businesses have highly compelling growth opportunities, they'll typically return some money to shareholders.

In Conclusion...

In summary, Archer-Daniels-Midland isn't compounding its earnings but is generating stable returns on the same amount of capital employed. Since the stock has gained an impressive 57% over the last five years, investors must think there's better things to come. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

If you want to continue researching Archer-Daniels-Midland, you might be interested to know about the 2 warning signs that our analysis has discovered.

While Archer-Daniels-Midland isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.