There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in Cal-Maine Foods' (NASDAQ:CALM) returns on capital, so let's have a look.
Return On Capital Employed (ROCE): What Is It?
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 Cal-Maine Foods:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.45 = US$794m ÷ (US$1.9b - US$126m) (Based on the trailing twelve months to September 2023).
Therefore, Cal-Maine Foods has an ROCE of 45%. In absolute terms that's a great return and it's even better than the Food industry average of 11%.
Check out our latest analysis for Cal-Maine Foods
In the above chart we have measured Cal-Maine 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 Cal-Maine Foods here for free.
The Trend Of ROCE
Investors would be pleased with what's happening at Cal-Maine Foods. Over the last five years, returns on capital employed have risen substantially to 45%. Basically the business is earning more per dollar of capital invested and in addition to that, 69% more capital is being employed now too. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.
What We Can Learn From Cal-Maine Foods' ROCE
To sum it up, Cal-Maine Foods has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Considering the stock has delivered 28% to its stockholders over the last five years, it may be fair to think that investors aren't fully aware of the promising trends yet. So with that in mind, we think the stock deserves further research.
Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for Cal-Maine Foods (of which 1 doesn't sit too well with us!) that you should know about.
If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.
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.
