If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Having said that, from a first glance at Elders (ASX:ELD) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Elders is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.17 = AU$170m ÷ (AU$2.3b - AU$1.3b) (Based on the trailing twelve months to March 2023).

Therefore, Elders has an ROCE of 17%. In absolute terms, that's a satisfactory return, but compared to the Food industry average of 3.9% it's much better.

View our latest analysis for Elders  roce

Above you can see how the current ROCE for Elders 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 freereport on analyst forecasts for the company.

What Does the ROCE Trend For Elders Tell Us?

When we looked at the ROCE trend at Elders, we didn't gain much confidence. Around five years ago the returns on capital were 23%, but since then they've fallen to 17%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.



On a related note, Elders has decreased its current liabilities to 57% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE. Either way, they're still at a pretty high level, so we'd like to see them fall further if possible.

In Conclusion...

While returns have fallen for Elders in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. These trends are starting to be recognized by investors since the stock has delivered a 14% gain to shareholders who've held over the last five years. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.

One more thing: We've identified  3 warning signs  with Elders (at least 1 which is a bit unpleasant)  , and understanding these would certainly be useful.

If you want to search for solid companies with great earnings, check out this freelist of companies with good balance sheets and impressive returns on equity.

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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.