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There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. Speaking of which, we noticed some great changes in Retail Food Group's (ASX:RFG) returns on capital, so let's have a look.
Understanding Return On Capital Employed (ROCE)
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 Retail Food Group is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.016 = AU$4.9m ÷ (AU$369m - AU$53m) (Based on the trailing twelve months to June 2024).
Therefore, Retail Food Group has an ROCE of 1.6%. In absolute terms, that's a low return and it also under-performs the Hospitality industry average of 9.7%.
See our latest analysis for Retail Food Group
In the above chart we have measured Retail Food Group's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Retail Food Group .
What Can We Tell From Retail Food Group's ROCE Trend?
The fact that Retail Food Group is now generating some pre-tax profits from its prior investments is very encouraging. The company was generating losses five years ago, but now it's earning 1.6% which is a sight for sore eyes. Not only that, but the company is utilizing 283% more capital than before, but that's to be expected from a company trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.
On a related note, the company's ratio of current liabilities to total assets has decreased to 14%, which basically reduces it's funding from the likes of short-term creditors or suppliers. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books.
The Key Takeaway
Long story short, we're delighted to see that Retail Food Group's reinvestment activities have paid off and the company is now profitable. Astute investors may have an opportunity here because the stock has declined 61% in the last five years. That being the case, research into the company's current valuation metrics and future prospects seems fitting.