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ForFarmers (AMS:FFARM) Has Some Way To Go To Become A Multi-Bagger

Simply Wall St · 04/07 12:17

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at ForFarmers (AMS:FFARM) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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What Is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for ForFarmers, this is the formula:

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

0.085 = €46m ÷ (€942m - €404m) (Based on the trailing twelve months to December 2024).

So, ForFarmers has an ROCE of 8.5%. In absolute terms, that's a low return and it also under-performs the Food industry average of 11%.

See our latest analysis for ForFarmers

roce
ENXTAM:FFARM Return on Capital Employed April 7th 2025

Above you can see how the current ROCE for ForFarmers 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 ForFarmers for free.

So How Is ForFarmers' ROCE Trending?

There hasn't been much to report for ForFarmers' returns and its level of capital employed because both metrics have been steady for the past five years. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. So don't be surprised if ForFarmers doesn't end up being a multi-bagger in a few years time. This probably explains why ForFarmers is paying out 56% of its income to shareholders in the form of dividends. Given the business isn't reinvesting in itself, it makes sense to distribute a portion of earnings among shareholders.

Another thing to note, ForFarmers has a high ratio of current liabilities to total assets of 43%. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line

In a nutshell, ForFarmers has been trudging along with the same returns from the same amount of capital over the last five years. And in the last five years, the stock has given away 10% so the market doesn't look too hopeful on these trends strengthening any time soon. Therefore based on the analysis done in this article, we don't think ForFarmers has the makings of a multi-bagger.

On a final note, we've found 2 warning signs for ForFarmers that we think you should be aware of.

While ForFarmers may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.