There are a few key trends to look for if we want to identify the next multi-bagger. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Having said that, from a first glance at ADM Hamburg (FRA:OEL) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
Understanding 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 ADM Hamburg is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.077 = €13m ÷ (€178m - €15m) (Based on the trailing twelve months to June 2023).
Therefore, ADM Hamburg has an ROCE of 7.7%. In absolute terms, that's a low return but it's around the Food industry average of 9.2%.
View our latest analysis for ADM Hamburg
Historical performance is a great place to start when researching a stock so above you can see the gauge for ADM Hamburg's ROCE against it's prior returns. If you'd like to look at how ADM Hamburg has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
How Are Returns Trending?
In terms of ADM Hamburg's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 7.7% from 27% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.
On a side note, ADM Hamburg has done well to pay down its current liabilities to 8.4% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.
What We Can Learn From ADM Hamburg's ROCE
In summary, despite lower returns in the short term, we're encouraged to see that ADM Hamburg is reinvesting for growth and has higher sales as a result. In light of this, the stock has only gained 1.6% over the last five years. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.