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If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at Goodfood Market (TSE:FOOD) and its trend of ROCE, we really liked what we saw.
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. Analysts use this formula to calculate it for Goodfood Market:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.051 = CA$1.5m ÷ (CA$54m - CA$24m) (Based on the trailing twelve months to June 2024).
So, Goodfood Market has an ROCE of 5.1%. In absolute terms, that's a low return and it also under-performs the Consumer Retailing industry average of 12%.
See our latest analysis for Goodfood Market
Above you can see how the current ROCE for Goodfood Market compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Goodfood Market for free.
How Are Returns Trending?
Like most people, we're pleased that Goodfood Market is now generating some pretax earnings. While the business is profitable now, it used to be incurring losses on invested capital five years ago. At first glance, it seems the business is getting more proficient at generating returns, because over the same period, the amount of capital employed has reduced by 32%. Goodfood Market could be selling under-performing assets since the ROCE is improving.
On a separate but related note, it's important to know that Goodfood Market has a current liabilities to total assets ratio of 45%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.
What We Can Learn From Goodfood Market's ROCE
From what we've seen above, Goodfood Market has managed to increase it's returns on capital all the while reducing it's capital base. And since the stock has dived 91% over the last five years, there may be other factors affecting the company's prospects. In any case, we believe the economic trends of this company are positive and looking into the stock further could prove rewarding.