To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So when we looked at Eggriculture Foods (HKG:8609) 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. Analysts use this formula to calculate it for Eggriculture Foods:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.18 = S$15m ÷ (S$108m - S$24m) (Based on the trailing twelve months to March 2024).
Thus, Eggriculture Foods has an ROCE of 18%. On its own, that's a standard return, however it's much better than the 8.5% generated by the Food industry.
View our latest analysis for Eggriculture Foods
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Eggriculture Foods has performed in the past in other metrics, you can view this free graph of Eggriculture Foods' past earnings, revenue and cash flow.
So How Is Eggriculture Foods' ROCE Trending?
Eggriculture Foods is displaying some positive trends. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 18%. The amount of capital employed has increased too, by 195%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.
What We Can Learn From Eggriculture Foods' ROCE
To sum it up, Eggriculture Foods has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. In light of that, we think it's worth looking further into this stock because if Eggriculture Foods can keep these trends up, it could have a bright future ahead.
If you want to know some of the risks facing Eggriculture Foods we've found 2 warning signs (1 makes us a bit uncomfortable!) that you should be aware of before investing here.
While Eggriculture 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.
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