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There are a few key trends to look for if we want to identify the next multi-bagger. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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. And in light of that, the trends we're seeing at Bumitama Agri's (SGX:P8Z) look very promising so lets take a look.
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 Bumitama Agri:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.27 = Rp4.8t ÷ (Rp20t - Rp1.9t) (Based on the trailing twelve months to December 2022).
Therefore, Bumitama Agri has an ROCE of 27%. In absolute terms that's a great return and it's even better than the Food industry average of 12%.
View our latest analysis for Bumitama Agri
In the above chart we have measured Bumitama Agri's 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 Bumitama Agri here for free.
What Can We Tell From Bumitama Agri's ROCE Trend?
Investors would be pleased with what's happening at Bumitama Agri. The data shows that returns on capital have increased substantially over the last five years to 27%. Basically the business is earning more per dollar of capital invested and in addition to that, 29% more capital is being employed now too. So we're very much inspired by what we're seeing at Bumitama Agri thanks to its ability to profitably reinvest capital.
The Bottom Line
To sum it up, Bumitama Agri has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Since the stock has only returned 10% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. So with that in mind, we think the stock deserves further research.
One final note, you should learn about the 2 warning signs we've spotted with Bumitama Agri (including 1 which is a bit concerning) .
If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.