There are a few key trends to look for if we want to identify the next multi-bagger. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. So when we looked at Kellogg (NYSE:K) and its trend of ROCE, we really liked what we saw.
Understanding Return On Capital Employed (ROCE)
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Kellogg is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.14 = US$1.7b ÷ (US$19b - US$5.9b) (Based on the trailing twelve months to June 2020).
Thus, Kellogg has an ROCE of 14%. In absolute terms, that's a satisfactory return, but compared to the Food industry average of 8.3% it's much better.
In the above chart we have measured Kellogg's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Kellogg here for free.
What The Trend Of ROCE Can Tell Us
Kellogg is displaying some positive trends. The data shows that returns on capital have increased substantially over the last five years to 14%. The amount of capital employed has increased too, by 21%. So we're very much inspired by what we're seeing at Kellogg thanks to its ability to profitably reinvest capital.
The Key Takeaway
In summary, it's great to see that Kellogg 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. Considering the stock has delivered 9.0% to its stockholders over the last five years, it may be fair to think that investors aren't fully aware of the promising trends yet. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.
One final note, you should learn about the 2 warning signs we've spotted with Kellogg (including 1 which is is significant) .
While Kellogg may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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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