Returns At Archer-Daniels-Midland (NYSE:ADM) Are On The Way Up

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So when we looked at Archer-Daniels-Midland (NYSE:ADM) and its trend of ROCE, we really liked what we saw.

Understanding Return On Capital Employed (ROCE)

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. Analysts use this formula to calculate it for Archer-Daniels-Midland:

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

0.12 = US$4.2b ÷ (US$60b - US$24b) (Based on the trailing twelve months to December 2022).

So, Archer-Daniels-Midland has an ROCE of 12%. That's a relatively normal return on capital, and it's around the 10% generated by the Food industry.

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.

SWOT Analysis for Archer-Daniels-Midland

What Does the ROCE Trend For Archer-Daniels-Midland Tell Us?

Investors would be pleased with what's happening at Archer-Daniels-Midland. The data shows that returns on capital have increased substantially over the last five years to 12%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 30%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

On a side note, Archer-Daniels-Midland's current liabilities are still rather high at 40% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

Our Take On Archer-Daniels-Midland's ROCE

All in all, it's terrific to see that Archer-Daniels-Midland is reaping the rewards from prior investments and is growing its capital base. And a remarkable 110% total return over the last five years tells us that investors are expecting more good things to come in the future. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

If you want to continue researching Archer-Daniels-Midland, you might be interested to know about the 1 warning sign that our analysis has discovered.

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.