Tate & Lyle (LON:TATE) Hasn't Managed To Accelerate Its Returns
If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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 Tate & Lyle (LON:TATE) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
Return On Capital Employed (ROCE): What Is It?
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. To calculate this metric for Tate & Lyle, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.12 = UK£229m ÷ (UK£2.3b - UK£383m) (Based on the trailing twelve months to September 2023).
So, Tate & Lyle has an ROCE of 12%. On its own, that's a standard return, however it's much better than the 9.2% generated by the Food industry.
See our latest analysis for Tate & Lyle
In the above chart we have measured Tate & Lyle'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 analyst report for Tate & Lyle .
So How Is Tate & Lyle's ROCE Trending?
Over the past five years, Tate & Lyle's ROCE and capital employed have both remained mostly flat. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. So don't be surprised if Tate & Lyle doesn't end up being a multi-bagger in a few years time. With fewer investment opportunities, it makes sense that Tate & Lyle has been paying out a decent 34% of its earnings to shareholders. Given the business isn't reinvesting in itself, it makes sense to distribute a portion of earnings among shareholders.
The Bottom Line On Tate & Lyle's ROCE
In summary, Tate & Lyle isn't compounding its earnings but is generating stable returns on the same amount of capital employed. And investors may be recognizing these trends since the stock has only returned a total of 5.3% to shareholders over the last five years. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.
On a separate note, we've found 1 warning sign for Tate & Lyle you'll probably want to know about.
While Tate & Lyle 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.
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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.
