Finding a business that has the potential to grow significantly isn’t easy, but it is possible if we take a look at a few key financial metrics. Ideally, a business will display two trends; first growth to recover on capital employed (ROCE) and on the other hand, an increase amount capital employed. Ultimately, this demonstrates that this is a company that is reinvesting its profits at increasing rates of return. So on that note, TreeHouse Foods (NYSE: THS) looks pretty promising when it comes to its ROI trends.
Understanding Return on Capital Employed (ROCE)
If you’ve never worked with ROCE before, it measures the “return” (profit before tax) that a business generates on capital employed in its business. 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).
Thereby, TreeHouse Foods has a ROCE of 6.2%. In absolute terms, this is a low yield and it is also below the food industry average of 10%.
Check out our latest review for TreeHouse Foods
In the graph above, we measured TreeHouse Foods’ past ROCE against its past performance, but arguably the future is more important. If you like, you can check out the analysts’ forecasts covering TreeHouse Foods here for free.
What does the ROCE trend tell us for TreeHouse foods?
We’re pretty happy with the ROCE trend at TreeHouse Foods. Figures show that over the past five years, returns on capital have increased by 40%. The company now earns US $ 0.06 per dollar of capital employed. When it comes to capital employed, TreeHouse Foods appears to be doing more with less, as the company uses 33% less capital to run its operations. A business that is shrinking its asset base like this is usually not typical of a business that will soon be multi-bagger.
TreeHouse Foods ROCE result
In a nutshell, we are delighted to see that TreeHouse Foods has been able to generate higher returns with less capital. Savvy investors may have an opportunity here because the stock has fallen 62% in the past five years. However, research into current valuation metrics and the company’s future prospects seems appropriate.
If you’re interested in learning more about TreeHouse Foods, we’ve spotted 3 warning signs, and 1 of them cannot be ignored.
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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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in the mentioned stocks.
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