Did you know that certain financial measures can provide clues about a potential multi-bagger? First, we would like to identify a growth to recover on capital employed (ROCE) and at the same time, a based capital employed. Basically, it means that a business has profitable initiatives that it can keep reinvesting in, which is a hallmark of a dialing machine. Speaking of which, we have noticed some big changes in TreeHouse Foods’ (NYSE: THS) returns of capital, so let’s take a look.
Return on capital employed (ROCE): what is it?
For those who don’t know, ROCE is a measure of a company’s annual pre-tax profit (its return), relative to the capital employed in the company. To calculate this metric for TreeHouse Foods, here is the formula:
Return on capital employed = Profit before interest and taxes (EBIT) ÷ (Total assets – Current liabilities)
0.062 = US $ 260 million ÷ (US $ 5.1 billion – US $ 900 million) (Based on the last twelve months up to June 2021).
Therefore, TreeHouse Foods has a ROCE of 6.2%. In the end, that’s a low yield and it’s lower than the food industry average of 9.5%.
NYSE: THS Return on Capital Employed September 24, 2021
In the graph above, we measured TreeHouse Foods’ past ROCE against its past performance, but arguably the future is more important. If you’d like to see what analysts are forecasting for the future, you should check out our free report for TreeHouse Foods.
What does the ROCE trend tell us for TreeHouse foods?
You’d be hard pressed not to be impressed with the ROCE trend at TreeHouse Foods. Data shows that returns on capital have increased 40% over the past five years. This is not bad because it indicates that for every dollar invested (capital employed), the company increases the amount earned on that dollar. Interestingly, the business can become more efficient because it uses 33% less capital than it was five years ago. TreeHouse Foods may be selling some assets, so it’s worth checking out if the company has any future investment plans to further increase returns.
The key to take away
From what we have seen above, TreeHouse Foods has been successful in increasing its return on capital while reducing its capital base. Savvy investors may have an opportunity here because the stock has fallen 55% in the past five years. With that in mind, we believe the promising trends warrant further investigation of this stock.
Since virtually every business faces risks, it’s worth knowing about them, and we’ve spotted 2 warning signs for TreeHouse Foods (of which 1 is significant!) that you should know.
For those who like to invest in solid companies, Check it out free list of companies with strong balance sheets and high returns on equity.
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