Investors Will Want Cal-Maine Foods’ (NASDAQ:CALM) Growth In ROCE To Persist


To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we’ll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it’s a business that is reinvesting profits at increasing rates of return. So on that note, Cal Maine Foods (NASDAQ:CALM) looks quite promising in regards to its trends of return on capital.

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. Analysts use this formula to calculate it for Cal-Maine Foods:

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

0.11 = US$138m ÷ (US$1.4b – US$185m) (Based on the trailing twelve months to May 2022).

therefore, Cal-Maine Foods has a ROCE of 11%. That’s a relatively normal return on capital, and it’s around the 9.5% generated by the Food industry.

Check out our latest analysis for Cal-Maine Foods

NasdaqGS:CALM Return on Capital Employed September 27th 2022

Above you can see how the current ROCE for Cal-Maine Foods compares to its prior returns on capital, but there’s only so much you can tell from the past. If you’d like, you can check out the forecasts from the analysts covering Cal-Maine Foods here for free.

What The Trend Of ROCE Can Tell Us

The fact that Cal-Maine Foods is now generating some pre-tax profits from its prior investments is very encouraging. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is now generating 11% on its capital. In addition to that, Cal-Maine Foods is employing 28% more capital than previously which is expected of a company that’s trying to break into profitability. This can indicate that there’s plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

The Bottom Line On Cal-Maine Foods’ ROCE

Overall, Cal-Maine Foods gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. And with a respectable 49% 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 more thing to note, we’ve identified 1 warning sign with Cal-Maine Foods and understanding it should be part of your investment process.

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.

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.

Valuation is complex, but we’re helping make it simple.

Find out whether Cal Maine Foods is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

View the Free Analysis

Leave a Comment

Your email address will not be published. Required fields are marked *