Yahoo Finance Farm Pride Foods' (ASX:FRM) Returns On Capital Are Heading Higher
If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. 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. So when we looked at Farm Pride Foods (ASX:FRM) and its trend of ROCE, we really liked what we saw.
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. To calculate this metric for Farm Pride Foods, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.0093 = AU$219k ÷ (AU$62m - AU$38m) (Based on the trailing twelve months to December 2023).
Thus, Farm Pride Foods has an ROCE of 0.9%. Ultimately, that's a low return and it under-performs the Food industry average of 12%.
View our latest analysis for Farm Pride Foods
Historical performance is a great place to start when researching a stock so above you can see the gauge for Farm Pride Foods' ROCE against it's prior returns. If you'd like to look at how Farm Pride Foods has performed in the past in other metrics, you can view this free graph of Farm Pride Foods' past earnings, revenue and cash flow.
The Trend Of ROCE
It's great to see that Farm Pride Foods has started to generate some pre-tax earnings from prior investments. While the business is profitable now, it used to be incurring losses on invested capital five years ago. In regards to capital employed, Farm Pride Foods is using 47% less capital than it was five years ago, which on the surface, can indicate that the business has become more efficient at generating these returns. Farm Pride Foods could be selling under-performing assets since the ROCE is improving.
On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. The current liabilities has increased to 62% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.
In Conclusion...
From what we've seen above, Farm Pride Foods has managed to increase it's returns on capital all the while reducing it's capital base. Astute investors may have an opportunity here because the stock has declined 55% in the last five years. With that in mind, we believe the promising trends warrant this stock for further investigation.
One final note, you should learn about the 3 warning signs we've spotted with Farm Pride Foods (including 1 which is potentially serious) .
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
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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.
