The Return Trends At Archer-Daniels-Midland (NYSE:ADM) Look Promising

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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So on that note, Archer-Daniels-Midland (NYSE:ADM) looks quite promising in regards to its trends of return on capital.

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. 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)

0.087 = US$3.0b ÷ (US$53b - US$19b) (Based on the trailing twelve months to June 2024).

Thus, Archer-Daniels-Midland has an ROCE of 8.7%. In absolute terms, that's a low return but it's around 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 to see what analysts are forecasting going forward, you should check out our free analyst report for Archer-Daniels-Midland .

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

Archer-Daniels-Midland's ROCE growth is quite impressive. Looking at the data, we can see that even though capital employed in the business has remained relatively flat, the ROCE generated has risen by 66% over the last five years. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.

The Key Takeaway

In summary, we're delighted to see that Archer-Daniels-Midland has been able to increase efficiencies and earn higher rates of return on the same amount of capital. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 63% return over the last five years. Therefore, we think it would be worth your time to check if these trends are going to continue.

If you want to know some of the risks facing Archer-Daniels-Midland we've found 2 warning signs (1 shouldn't be ignored!) that you should be aware of before investing here.

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.