Nomad Foods (NYSE:NOMD) Hasn't Managed To Accelerate Its Returns

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Having said that, from a first glance at Nomad Foods (NYSE:NOMD) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper 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 Nomad Foods, this is the formula:

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

0.077 = €424m ÷ (€6.5b - €955m) (Based on the trailing twelve months to September 2022).

Thus, Nomad Foods has an ROCE of 7.7%. On its own, that's a low figure but it's around the 9.5% average generated by the Food industry.

Check out our latest analysis for Nomad Foods

In the above chart we have measured Nomad 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 Nomad Foods.

What The Trend Of ROCE Can Tell Us

The returns on capital haven't changed much for Nomad Foods in recent years. The company has consistently earned 7.7% for the last five years, and the capital employed within the business has risen 42% in that time. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

What We Can Learn From Nomad Foods' ROCE

In summary, Nomad Foods has simply been reinvesting capital and generating the same low rate of return as before. And with the stock having returned a mere 5.8% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

If you'd like to know about the risks facing Nomad Foods, we've discovered 1 warning sign that you should be aware of.

While Nomad Foods isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.