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Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. So after we looked into Del Monte Pacific (SGX:D03), the trends above didn't look too great.
What Is Return On Capital Employed (ROCE)?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Del Monte Pacific is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.016 = US$27m ÷ (US$3.1b - US$1.4b) (Based on the trailing twelve months to July 2024).
Thus, Del Monte Pacific has an ROCE of 1.6%. Ultimately, that's a low return and it under-performs the Food industry average of 9.0%.
See our latest analysis for Del Monte Pacific
Historical performance is a great place to start when researching a stock so above you can see the gauge for Del Monte Pacific'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 Del Monte Pacific.
The Trend Of ROCE
In terms of Del Monte Pacific's historical ROCE movements, the trend doesn't inspire confidence. Unfortunately the returns on capital have diminished from the 5.0% that they were earning five years ago. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Del Monte Pacific becoming one if things continue as they have.
On a side note, Del Monte Pacific's current liabilities have increased over the last five years to 46% of total assets, effectively distorting the ROCE to some degree. Without this increase, it's likely that ROCE would be even lower than 1.6%. And with current liabilities at these levels, suppliers or short-term creditors are effectively funding a large part of the business, which can introduce some risks.