Did you know there are financial metrics that can hint at investment opportunities? One key metric is the Return on Capital Employed (ROCE). Ideally, for a company to be a potential multi-bagger, it should have a growing ROCE alongside an increasing amount of capital employed. This suggests the company has profitable projects it can keep reinvesting in—like a compounding machine. Let’s take a closer look at Where Food Comes From (NASDAQ: WFCF) and its ROCE trends.
ROCE measures how efficiently a company generates profit from its capital. It can be calculated with this formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
For Where Food Comes From, the calculation looks like this:
0.20 = US$2.4m ÷ (US$17m – US$5.2m) (Based on the trailing twelve months to September 2024).
This means Where Food Comes From has a 20% ROCE, which is impressive. It’s even better than the average of 16% for the Professional Services industry.
Over the past five years, the ROCE at Where Food Comes From has skyrocketed by 262%. This is a great sign; it indicates the company has improved its ability to earn money relative to the capital it uses. Interestingly, it has also reduced the amount of capital employed by 27% compared to five years ago. This shift may suggest improved efficiency, perhaps by selling off some assets. However, it’s important to check if the company has plans for future investments to maintain or improve these returns.
On a related note, we observed that the rise in ROCE is partly due to a 31% increase in current liabilities. This means the company is relying more on its suppliers and short-term creditors for funding. While this can help with cash flow, it’s something to watch, as higher liabilities can bring some risk.
In summary, Where Food Comes From has successfully boosted its returns on capital while lowering its capital base. The stock has provided a solid 49% return to shareholders over the past five years, indicating that investors are catching on to these positive changes. However, it’s crucial to keep researching to understand the company better.
If you’re curious about the company’s past performance, you can check out a graph of Where Food Comes From’s earnings, revenue, and cash flow.
There’s more to explore with stocks like Where Food Comes From that are earning strong returns. If you’re interested, you can find a list of companies with solid fundamentals and high returns.
Check out this related article: 11 Must-Have Costco Items Every Food Editor Swears By: Elevate Your Grocery Game!
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