Slowing Rates Of Return At Archer-Daniels-Midland (NYSE:ADM) Leave Little Room For Excitement
Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Archer-Daniels-Midland (NYSE:ADM) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
Understanding Return On Capital Employed (ROCE)
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 Archer-Daniels-Midland:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.071 = US$2.3b ÷ (US$51b - US$19b) (Based on the trailing twelve months to March 2021).
So, Archer-Daniels-Midland has an ROCE of 7.1%. Ultimately, that's a low return and it under-performs the Food industry average of 10%.
View our latest analysis for Archer-Daniels-Midland
In the above chart we have measured Archer-Daniels-Midland'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 Archer-Daniels-Midland.
So How Is Archer-Daniels-Midland's ROCE Trending?
In terms of Archer-Daniels-Midland's historical ROCE trend, it doesn't exactly demand attention. Over the past five years, ROCE has remained relatively flat at around 7.1% and the business has deployed 23% more capital into its operations. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.
Our Take On Archer-Daniels-Midland's ROCE
In conclusion, Archer-Daniels-Midland has been investing more capital into the business, but returns on that capital haven't increased. Since the stock has gained an impressive 60% over the last five years, investors must think there's better things to come. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.
One more thing, we've spotted 2 warning signs facing Archer-Daniels-Midland that you might find interesting.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
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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