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Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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. Having said that, from a first glance at General Mills (NYSE:GIS) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
Return On Capital Employed (ROCE): What Is It?
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. Analysts use this formula to calculate it for General Mills:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.13 = US$3.1b ÷ (US$31b - US$7.5b) (Based on the trailing twelve months to May 2023).
Therefore, General Mills has an ROCE of 13%. In absolute terms, that's a satisfactory return, but compared to the Food industry average of 11% it's much better.
See our latest analysis for General Mills
In the above chart we have measured General Mills' 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 General Mills here for free.
So How Is General Mills' ROCE Trending?
There hasn't been much to report for General Mills' returns and its level of capital employed because both metrics have been steady for the past five years. This tells us the company isn't reinvesting in itself, so it's plausible that it's past the growth phase. So don't be surprised if General Mills doesn't end up being a multi-bagger in a few years time. This probably explains why General Mills is paying out 51% of its income to shareholders in the form of dividends. Unless businesses have highly compelling growth opportunities, they'll typically return some money to shareholders.
Our Take On General Mills' ROCE
In a nutshell, General Mills has been trudging along with the same returns from the same amount of capital over the last five years. Although the market must be expecting these trends to improve because the stock has gained 64% over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.