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Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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. With that in mind, we've noticed some promising trends at Seneca Foods (NASDAQ:SENE.A) so let's look a bit deeper.
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. Analysts use this formula to calculate it for Seneca Foods:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.09 = US$111m ÷ (US$1.4b - US$151m) (Based on the trailing twelve months to March 2024).
Therefore, Seneca Foods has an ROCE of 9.0%. On its own, that's a low figure but it's around the 11% average generated by the Food industry.
View our latest analysis for Seneca Foods
Historical performance is a great place to start when researching a stock so above you can see the gauge for Seneca Foods' ROCE against it's prior returns. If you'd like to look at how Seneca Foods has performed in the past in other metrics, you can view this free graph of Seneca Foods' past earnings, revenue and cash flow.
The Trend Of ROCE
Seneca Foods has recently broken into profitability so their prior investments seem to be paying off. About five years ago the company was generating losses but things have turned around because it's now earning 9.0% on its capital. Not only that, but the company is utilizing 67% more capital than before, but that's to be expected from a company trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.
The Key Takeaway
Overall, Seneca Foods gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. Therefore, we think it would be worth your time to check if these trends are going to continue.
Like most companies, Seneca Foods does come with some risks, and we've found 1 warning sign that you should be aware of.