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There are a few key trends to look for if we want to identify the next multi-bagger. 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Speaking of which, we noticed some great changes in Fraser and Neave's (SGX:F99) returns on capital, so let's have a look.
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. The formula for this calculation on Fraser and Neave is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.049 = S$218m ÷ (S$5.2b - S$796m) (Based on the trailing twelve months to December 2024).
Thus, Fraser and Neave has an ROCE of 4.9%. In absolute terms, that's a low return and it also under-performs the Food industry average of 12%.
See our latest analysis for Fraser and Neave
Historical performance is a great place to start when researching a stock so above you can see the gauge for Fraser and Neave's 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 Fraser and Neave .
The Trend Of ROCE
Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. The figures show that over the last five years, ROCE has grown 34% whilst employing roughly the same amount of capital. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.
The Bottom Line On Fraser and Neave's ROCE
To bring it all together, Fraser and Neave has done well to increase the returns it's generating from its capital employed. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 13% to shareholders. So with that in mind, we think the stock deserves further research.
One more thing: We've identified 2 warning signs with Fraser and Neave (at least 1 which is a bit concerning) , and understanding these would certainly be useful.