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To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding 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 ran our eye over Associated British Foods' (LON:ABF) trend of ROCE, we liked what we saw.
Our free stock report includes 1 warning sign investors should be aware of before investing in Associated British Foods. Read for free now.
Understanding Return On Capital Employed (ROCE)
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Associated British Foods is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.12 = UK£1.9b ÷ (UK£19b - UK£3.7b) (Based on the trailing twelve months to September 2024).
So, Associated British Foods has an ROCE of 12%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Food industry average of 13%.
See our latest analysis for Associated British Foods
In the above chart we have measured Associated British Foods' prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Associated British Foods for free.
What Can We Tell From Associated British Foods' ROCE Trend?
While the returns on capital are good, they haven't moved much. The company has consistently earned 12% for the last five years, and the capital employed within the business has risen 44% in that time. Since 12% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.
The Bottom Line On Associated British Foods' ROCE
To sum it up, Associated British Foods has simply been reinvesting capital steadily, at those decent rates of return. However, over the last five years, the stock has only delivered a 30% return to shareholders who held over that period. So because of the trends we're seeing, we'd recommend looking further into this stock to see if it has the makings of a multi-bagger.
One more thing to note, we've identified 1 warning sign with Associated British Foods and understanding this should be part of your investment process.