What trends should we look for it we want to identify stocks that can multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Abundance International (Catalist:541), it didn't seem to tick all of these boxes.
Return On Capital Employed (ROCE): What Is It?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Abundance International:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.018 = US$750k ÷ (US$80m - US$38m) (Based on the trailing twelve months to June 2022).
Thus, Abundance International has an ROCE of 1.8%. Ultimately, that's a low return and it under-performs the Trade Distributors industry average of 5.7%.
View our latest analysis for Abundance International
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're interested in investigating Abundance International's past further, check out this free graph of past earnings, revenue and cash flow.
What Can We Tell From Abundance International's ROCE Trend?
On the surface, the trend of ROCE at Abundance International doesn't inspire confidence. Around five years ago the returns on capital were 6.4%, but since then they've fallen to 1.8%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.
On a side note, Abundance International has done well to pay down its current liabilities to 48% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money. Keep in mind 48% is still pretty high, so those risks are still somewhat prevalent.
The Key Takeaway
In summary, despite lower returns in the short term, we're encouraged to see that Abundance International is reinvesting for growth and has higher sales as a result. And there could be an opportunity here if other metrics look good too, because the stock has declined 45% in the last five years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.