Clean Seas Seafood (ASX:CSS) Is Looking To Continue Growing Its Returns On Capital
If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at Clean Seas Seafood (ASX:CSS) and its trend of ROCE, we really liked what we saw.
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. Analysts use this formula to calculate it for Clean Seas Seafood:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.091 = AU$7.4m ÷ (AU$92m - AU$12m) (Based on the trailing twelve months to December 2022).
Thus, Clean Seas Seafood has an ROCE of 9.1%. On its own that's a low return, but compared to the average of 3.9% generated by the Food industry, it's much better.
View our latest analysis for Clean Seas Seafood
Above you can see how the current ROCE for Clean Seas Seafood compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Clean Seas Seafood.
What Does the ROCE Trend For Clean Seas Seafood Tell Us?
Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. The data shows that returns on capital have increased substantially over the last five years to 9.1%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 24%. So we're very much inspired by what we're seeing at Clean Seas Seafood thanks to its ability to profitably reinvest capital.
What We Can Learn From Clean Seas Seafood's ROCE
In summary, it's great to see that Clean Seas Seafood can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. And since the stock has fallen 55% over the last five years, there might be an opportunity here. That being the case, research into the company's current valuation metrics and future prospects seems fitting.
One final note, you should learn about the 2 warning signs we've spotted with Clean Seas Seafood (including 1 which doesn't sit too well with us) .
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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