The Returns On Capital At Industrias Bachoco. de (NYSE:IBA) Don't Inspire Confidence

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. In light of that, when we looked at Industrias Bachoco. de (NYSE:IBA) and its ROCE trend, we weren't exactly thrilled.

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 Industrias Bachoco. de is:

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

0.085 = Mex$4.3b ÷ (Mex$58b - Mex$8.0b) (Based on the trailing twelve months to December 2020).

So, Industrias Bachoco. de has an ROCE of 8.5%. In absolute terms, that's a low return but it's around the Food industry average of 8.4%.

Check out our latest analysis for Industrias Bachoco. de

Above you can see how the current ROCE for Industrias Bachoco. de 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 Industrias Bachoco. de here for free.

What Does the ROCE Trend For Industrias Bachoco. de Tell Us?

On the surface, the trend of ROCE at Industrias Bachoco. de doesn't inspire confidence. Around five years ago the returns on capital were 15%, but since then they've fallen to 8.5%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

In Conclusion...

While returns have fallen for Industrias Bachoco. de in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And there could be an opportunity here if other metrics look good too, because the stock has declined 14% in the last five years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

On a final note, we've found 1 warning sign for Industrias Bachoco. de that we think you should be aware of.

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