Yahoo Finance Be Wary Of Farmmi (NASDAQ:FAMI) And Its Returns On Capital
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'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. However, after briefly looking over the numbers, we don't think Farmmi (NASDAQ:FAMI) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
What Is Return On Capital Employed (ROCE)?
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. Analysts use this formula to calculate it for Farmmi:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.012 = US$2.0m ÷ (US$175m - US$11m) (Based on the trailing twelve months to September 2023).
So, Farmmi has an ROCE of 1.2%. In absolute terms, that's a low return and it also under-performs the Food industry average of 11%.
Check out our latest analysis for Farmmi
Historical performance is a great place to start when researching a stock so above you can see the gauge for Farmmi's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Farmmi.
What Can We Tell From Farmmi's ROCE Trend?
On the surface, the trend of ROCE at Farmmi doesn't inspire confidence. Over the last five years, returns on capital have decreased to 1.2% from 16% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.
The Bottom Line On Farmmi's ROCE
In summary, despite lower returns in the short term, we're encouraged to see that Farmmi is reinvesting for growth and has higher sales as a result. Despite these promising trends, the stock has collapsed 100% over the last five years, so there could be other factors hurting the company's prospects. Therefore, we'd suggest researching the stock further to uncover more about the business.
One more thing, we've spotted 3 warning signs facing Farmmi that you might find interesting.
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.
