Slowing Rates Of Return At Nomad Foods (NYSE:NOMD) Leave Little Room For Excitement
What trends should we look for it we want to identify stocks that can multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after investigating Nomad Foods (NYSE:NOMD), we don't think it's current trends fit the mold of a multi-bagger.
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. To calculate this metric for Nomad Foods, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.078 = €421m ÷ (€6.3b - €941m) (Based on the trailing twelve months to December 2022).
So, Nomad Foods has an ROCE of 7.8%. In absolute terms, that's a low return and it also under-performs the Food industry average of 10%.
View our latest analysis for Nomad Foods
In the above chart we have measured Nomad Foods' 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 Nomad Foods here for free.
What Does the ROCE Trend For Nomad Foods Tell Us?
In terms of Nomad Foods' historical ROCE trend, it doesn't exactly demand attention. The company has consistently earned 7.8% for the last five years, and the capital employed within the business has risen 38% in that time. 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 Nomad Foods' ROCE
In conclusion, Nomad Foods has been investing more capital into the business, but returns on that capital haven't increased. Unsurprisingly, the stock has only gained 14% over the last five years, which potentially indicates that investors are accounting for this going forward. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.
Like most companies, Nomad Foods does come with some risks, and we've found 1 warning sign that you should be aware of.
While Nomad Foods 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.
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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