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What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after investigating Wilmar International (SGX:F34), we don't think it's current trends fit the mold of a multi-bagger.
Return On Capital Employed (ROCE): What Is It?
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. To calculate this metric for Wilmar International, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.086 = US$2.6b ÷ (US$60b - US$30b) (Based on the trailing twelve months to June 2023).
So, Wilmar International has an ROCE of 8.6%. In absolute terms, that's a low return and it also under-performs the Food industry average of 14%.
Check out our latest analysis for Wilmar International
In the above chart we have measured Wilmar International's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
What Does the ROCE Trend For Wilmar International Tell Us?
The returns on capital haven't changed much for Wilmar International in recent years. The company has consistently earned 8.6% for the last five years, and the capital employed within the business has risen 44% in that time. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.
On a separate but related note, it's important to know that Wilmar International has a current liabilities to total assets ratio of 49%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.
The Bottom Line On Wilmar International's ROCE
Long story short, while Wilmar International has been reinvesting its capital, the returns that it's generating haven't increased. And investors may be recognizing these trends since the stock has only returned a total of 40% to shareholders over the last five years. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.