Yahoo Finance Archer-Daniels-Midland (NYSE:ADM) Is Experiencing Growth In Returns On Capital
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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Speaking of which, we noticed some great changes in Archer-Daniels-Midland's (NYSE:ADM) returns on capital, so let's have a look.
Return On Capital Employed (ROCE): What Is It?
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 Archer-Daniels-Midland is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.10 = US$3.5b ÷ (US$55b - US$20b) (Based on the trailing twelve months to March 2024).
Therefore, Archer-Daniels-Midland has an ROCE of 10.0%. On its own, that's a low figure but it's around the 11% average generated by the Food industry.
See our latest analysis for Archer-Daniels-Midland
In the above chart we have measured Archer-Daniels-Midland's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Archer-Daniels-Midland .
What The Trend Of ROCE Can Tell Us
Archer-Daniels-Midland has not disappointed with their ROCE growth. More specifically, while the company has kept capital employed relatively flat over the last five years, the ROCE has climbed 64% in that same time. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.
The Bottom Line
In summary, we're delighted to see that Archer-Daniels-Midland has been able to increase efficiencies and earn higher rates of return on the same amount of capital. Since the stock has returned a solid 72% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.
If you want to continue researching Archer-Daniels-Midland, you might be interested to know about the 1 warning sign that our analysis has discovered.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.
