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We Like These Underlying Trends At Ceres Global Ag (TSE:CRP)

Simply Wall St
·3 min read

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So when we looked at Ceres Global Ag (TSE:CRP) and its trend of ROCE, we really liked what we saw.

What is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Ceres Global Ag:

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

0.052 = US$9.4m ÷ (US$255m - US$76m) (Based on the trailing twelve months to June 2020).

Therefore, Ceres Global Ag has an ROCE of 5.2%. On its own, that's a low figure but it's around the 6.3% average generated by the Commercial Services industry.

Check out our latest analysis for Ceres Global Ag

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While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Ceres Global Ag's past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From Ceres Global Ag's ROCE Trend?

Ceres Global Ag is showing promise given that its ROCE is trending up and to the right. The figures show that over the last five years, ROCE has grown 373% whilst employing roughly the same amount of capital. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.

Our Take On Ceres Global Ag's ROCE

In summary, we're delighted to see that Ceres Global Ag has been able to increase efficiencies and earn higher rates of return on the same amount of capital. And since the stock has fallen 40% over the last five years, there might be an opportunity here. With that in mind, we believe the promising trends warrant this stock for further investigation.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Ceres Global Ag (of which 1 doesn't sit too well with us!) that you should know about.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com.