If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. Having said that, from a first glance at Seaboard (NYSEMKT:SEB) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
What is 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. The formula for this calculation on Seaboard is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.031 = US$150m ÷ (US$5.9b - US$1.0b) (Based on the trailing twelve months to June 2020).
So, Seaboard has an ROCE of 3.1%. In absolute terms, that's a low return and it also under-performs the Food industry average of 8.3%.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Seaboard's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Seaboard, check out these free graphs here.
The Trend Of ROCE
When we looked at the ROCE trend at Seaboard, we didn't gain much confidence. Around five years ago the returns on capital were 9.4%, but since then they've fallen to 3.1%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.
The Bottom Line
In summary, Seaboard is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Unsurprisingly then, the total return to shareholders over the last five years has been flat. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.
Seaboard does have some risks, we noticed 3 warning signs (and 1 which is a bit unpleasant) we think 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.
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