Investors Met With Slowing Returns on Capital At Flowers Foods (NYSE:FLO)

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. With that in mind, the ROCE of Flowers Foods (NYSE:FLO) looks decent, right now, so lets see what the trend of returns can tell us.

What Is 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 Flowers Foods:

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

0.12 = US$352m ÷ (US$3.5b - US$542m) (Based on the trailing twelve months to April 2023).

Thus, Flowers Foods has an ROCE of 12%. In absolute terms, that's a satisfactory return, but compared to the Food industry average of 9.7% it's much better.

See our latest analysis for Flowers Foods

In the above chart we have measured Flowers Foods' 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 Flowers Foods.

What Does the ROCE Trend For Flowers Foods Tell Us?

While the current returns on capital are decent, they haven't changed much. Over the past five years, ROCE has remained relatively flat at around 12% and the business has deployed 28% more capital into its operations. 12% is a pretty standard return, and it provides some comfort knowing that Flowers Foods has consistently earned this amount. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.

What We Can Learn From Flowers Foods' ROCE

The main thing to remember is that Flowers Foods has proven its ability to continually reinvest at respectable rates of return. In light of this, the stock has only gained 40% over the last five years for shareholders who have owned the stock in this period. That's why it could be worth your time looking into this stock further to discover if it has more traits of a multi-bagger.

Like most companies, Flowers Foods does come with some risks, and we've found 3 warning signs that you should be aware of.

While Flowers Foods 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.