Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. With that in mind, we've noticed some promising trends at Cal-Maine Foods (NASDAQ:CALM) so let's look a bit deeper.

Return On Capital Employed (ROCE): What Is It?

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. 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)

0.16 = US$314m ÷ (US$2.2b - US$228m) (Based on the trailing twelve months to June 2024).

Thus, Cal-Maine Foods has an ROCE of 16%. On its own, that's a standard return, however it's much better than the 11% generated by the Food industry.

Above you can see how the current ROCE for Cal-Maine Foods compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Cal-Maine Foods for free.

So How Is Cal-Maine Foods' ROCE Trending?

The trends we've noticed at Cal-Maine Foods are quite reassuring. The data shows that returns on capital have increased substantially over the last five years to 16%. Basically the business is earning more per dollar of capital invested and in addition to that, 81% more capital is being employed now too. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

Our Take On Cal-Maine Foods' ROCE

All in all, it's terrific to see that Cal-Maine Foods is reaping the rewards from prior investments and is growing its capital base. And with a respectable 77% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. In light of that, we think it's worth looking further into this stock because if Cal-Maine Foods can keep these trends up, it could have a bright future ahead.

One final note, you should learn about the 4 warning signs we've spotted with Cal-Maine Foods (including 1 which is potentially serious) .

While Cal-Maine Foods 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.