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Returns At Rare Foods Australia (ASX:RFA) Are On The Way Up

·3 min read

If you're looking for a multi-bagger, there's a few things to keep an eye out 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. 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 Rare Foods Australia (ASX:RFA) and its trend of ROCE, we really liked what we saw.

Return On Capital Employed (ROCE): What Is It?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Rare Foods Australia:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.0041 = AU$62k ÷ (AU$16m - AU$1.3m) (Based on the trailing twelve months to June 2022).

So, Rare Foods Australia has an ROCE of 0.4%. In absolute terms, that's a low return and it also under-performs the Food industry average of 5.3%.

See our latest analysis for Rare Foods Australia

roce
roce

Historical performance is a great place to start when researching a stock so above you can see the gauge for Rare Foods Australia's ROCE against it's prior returns. If you'd like to look at how Rare Foods Australia has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

We're delighted to see that Rare Foods Australia is reaping rewards from its investments and is now generating some pre-tax profits. About five years ago the company was generating losses but things have turned around because it's now earning 0.4% on its capital. And unsurprisingly, like most companies trying to break into the black, Rare Foods Australia is utilizing 60% more capital than it was five years ago. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

What We Can Learn From Rare Foods Australia's ROCE

To the delight of most shareholders, Rare Foods Australia has now broken into profitability. And since the stock has fallen 55% over the last three years, there might be an opportunity here. With that in mind, we believe the promising trends warrant this stock for further investigation.

Rare Foods Australia does come with some risks though, we found 4 warning signs in our investment analysis, and 3 of those shouldn't be ignored...

While Rare Foods Australia isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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