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There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. In light of that, when we looked at Fresh Del Monte Produce (NYSE:FDP) and its ROCE trend, we weren't exactly thrilled.
What is 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. To calculate this metric for Fresh Del Monte Produce, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.022 = US$61m ÷ (US$3.3b - US$552m) (Based on the trailing twelve months to June 2020).
So, Fresh Del Monte Produce has an ROCE of 2.2%. Ultimately, that's a low return and it under-performs the Food industry average of 8.3%.
In the above chart we have measured Fresh Del Monte Produce'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 report for Fresh Del Monte Produce.
What The Trend Of ROCE Can Tell Us
On the surface, the trend of ROCE at Fresh Del Monte Produce doesn't inspire confidence. To be more specific, ROCE has fallen from 7.9% over the last five years. However it looks like Fresh Del Monte Produce might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.
The Bottom Line On Fresh Del Monte Produce's ROCE
To conclude, we've found that Fresh Del Monte Produce is reinvesting in the business, but returns have been falling. And investors appear hesitant that the trends will pick up because the stock has fallen 42% in the last five years. Therefore based on the analysis done in this article, we don't think Fresh Del Monte Produce has the makings of a multi-bagger.
Fresh Del Monte Produce does have some risks though, and we've spotted 2 warning signs for Fresh Del Monte Produce that you might be interested in.
While Fresh Del Monte Produce isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
This article by Simply Wall St is general in nature. 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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