Investors Will Want Archer-Daniels-Midland's (NYSE:ADM) Growth In ROCE To Persist

What are the early trends we should look for to identify a stock that could multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in Archer-Daniels-Midland's (NYSE:ADM) returns on capital, so let's have a look.

Return On Capital Employed (ROCE): What Is It?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Archer-Daniels-Midland, this is the formula:

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

0.11 = US$4.1b ÷ (US$55b - US$18b) (Based on the trailing twelve months to September 2023).

Therefore, Archer-Daniels-Midland has an ROCE of 11%. That's a pretty standard return and it's in line with the industry average of 11%.

View our latest analysis for Archer-Daniels-Midland

In the above chart we have measured Archer-Daniels-Midland'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 Archer-Daniels-Midland.

What Can We Tell From Archer-Daniels-Midland's ROCE Trend?

Archer-Daniels-Midland is displaying some positive trends. Over the last five years, returns on capital employed have risen substantially to 11%. Basically the business is earning more per dollar of capital invested and in addition to that, 32% more capital is being employed now too. So we're very much inspired by what we're seeing at Archer-Daniels-Midland thanks to its ability to profitably reinvest capital.

In Conclusion...

To sum it up, Archer-Daniels-Midland has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And with a respectable 89% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. In light of that, we think it's worth looking further into this stock because if Archer-Daniels-Midland can keep these trends up, it could have a bright future ahead.

On a final note, we found 2 warning signs for Archer-Daniels-Midland (1 is a bit concerning) you should be aware of.

While Archer-Daniels-Midland 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.