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There are a few key trends to look for if we want to identify the next multi-bagger. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. 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 JB Foods (SGX:BEW), we don't think it's current trends fit the mold of a multi-bagger.
What Is 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. Analysts use this formula to calculate it for JB Foods:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.18 = US$51m ÷ (US$945m - US$662m) (Based on the trailing twelve months to June 2024).
Therefore, JB Foods has an ROCE of 18%. On its own, that's a standard return, however it's much better than the 9.0% generated by the Food industry.
View our latest analysis for JB Foods
Historical performance is a great place to start when researching a stock so above you can see the gauge for JB Foods' 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 JB Foods.
How Are Returns Trending?
On the surface, the trend of ROCE at JB Foods doesn't inspire confidence. To be more specific, ROCE has fallen from 25% over the last five years. 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. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.
On a side note, JB Foods' current liabilities have increased over the last five years to 70% of total assets, effectively distorting the ROCE to some degree. Without this increase, it's likely that ROCE would be even lower than 18%. 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.
The Bottom Line On JB Foods' ROCE
In summary, despite lower returns in the short term, we're encouraged to see that JB Foods is reinvesting for growth and has higher sales as a result. However, despite the promising trends, the stock has fallen 13% over the last five years, so there might be an opportunity here for astute investors. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.