Return Trends At Nomad Foods (NYSE:NOMD) Aren't Appealing

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. Although, when we looked at Nomad Foods (NYSE:NOMD), it didn't seem to tick all of these boxes.

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 Nomad Foods:

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

0.078 = €422m ÷ (€6.4b - €990m) (Based on the trailing twelve months to March 2023).

Therefore, Nomad Foods has an ROCE of 7.8%. On its own, that's a low figure but it's around the 9.7% average generated by the Food industry.

Check out our latest analysis for Nomad Foods

Above you can see how the current ROCE for Nomad Foods 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 Nomad Foods here for free.

The Trend Of ROCE

There are better returns on capital out there than what we're seeing at Nomad Foods. Over the past five years, ROCE has remained relatively flat at around 7.8% and the business has deployed 34% more capital into its operations. 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. Unsurprisingly then, the total return to shareholders over the last five years has been flat. Therefore based on the analysis done in this article, we don't think Nomad Foods has the makings of a multi-bagger.

On a separate note, we've found 1 warning sign for Nomad Foods you'll probably want to know about.

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.