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If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at Fresh Del Monte Produce (NYSE:FDP) and its trend of ROCE, we really liked what we saw.
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. The formula for this calculation on Fresh Del Monte Produce is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.058 = US$151m ÷ (US$3.2b - US$557m) (Based on the trailing twelve months to September 2024).
So, Fresh Del Monte Produce has an ROCE of 5.8%. 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 Fresh Del Monte Produce
In the above chart we have measured Fresh Del Monte Produce'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 Fresh Del Monte Produce for free.
What The Trend Of ROCE Can Tell Us
Fresh Del Monte Produce is showing promise given that its ROCE is trending up and to the right. Looking at the data, we can see that even though capital employed in the business has remained relatively flat, the ROCE generated has risen by 46% over the last five years. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.
In Conclusion...
As discussed above, Fresh Del Monte Produce appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 9.4% to shareholders. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.