What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Speaking of which, we noticed some great changes in Bumitama Agri's (SGX:P8Z) returns on capital, so let's have a look.
Understanding 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. To calculate this metric for Bumitama Agri, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.21 = Rp3.7t ÷ (Rp19t - Rp2.1t) (Based on the trailing twelve months to December 2023).
Therefore, Bumitama Agri has an ROCE of 21%. In absolute terms that's a great return and it's even better than the Food industry average of 7.6%.
Above you can see how the current ROCE for Bumitama Agri compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Bumitama Agri .
How Are Returns Trending?
Bumitama Agri is displaying some positive trends. Over the last five years, returns on capital employed have risen substantially to 21%. The amount of capital employed has increased too, by 70%. So we're very much inspired by what we're seeing at Bumitama Agri thanks to its ability to profitably reinvest capital.
On a related note, the company's ratio of current liabilities to total assets has decreased to 11%, which basically reduces it's funding from the likes of short-term creditors or suppliers. This tells us that Bumitama Agri has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.
Our Take On Bumitama Agri's ROCE
All in all, it's terrific to see that Bumitama Agri is reaping the rewards from prior investments and is growing its capital base. And with a respectable 47% 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. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.
One final note, you should learn about the 2 warning signs we've spotted with Bumitama Agri (including 1 which is a bit concerning) .
High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.
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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.