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If we want to find a stock that could multiply over the long term, what are the underlying trends we should look 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after investigating Maple Leaf Foods (TSE:MFI), we don't think it's current trends fit the mold of a multi-bagger.
Understanding Return On Capital Employed (ROCE)
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. To calculate this metric for Maple Leaf Foods, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.057 = CA$210m ÷ (CA$4.6b - CA$922m) (Based on the trailing twelve months to June 2024).
Thus, Maple Leaf Foods has an ROCE of 5.7%. In absolute terms, that's a low return and it also under-performs the Food industry average of 8.3%.
Check out our latest analysis for Maple Leaf Foods
Above you can see how the current ROCE for Maple Leaf Foods compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Maple Leaf Foods .
What Does the ROCE Trend For Maple Leaf Foods Tell Us?
There are better returns on capital out there than what we're seeing at Maple Leaf Foods. The company has consistently earned 5.7% for the last five years, and the capital employed within the business has risen 26% in that time. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.
The Bottom Line
In summary, Maple Leaf Foods has simply been reinvesting capital and generating the same low rate of return as before. Since the stock has declined 11% over the last five years, investors may not be too optimistic on this trend improving either. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.
Maple Leaf Foods does come with some risks though, we found 5 warning signs in our investment analysis, and 2 of those make us uncomfortable...