Fresh Del Monte Produce (NYSE:FDP) May Have Issues Allocating Its Capital

What underlying fundamental trends can indicate that a company might be in decline? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. So after glancing at the trends within Fresh Del Monte Produce (NYSE:FDP), we weren't too hopeful.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Fresh Del Monte Produce is:

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

0.026 = US$71m ÷ (US$3.4b - US$663m) (Based on the trailing twelve months to July 2022).

Therefore, Fresh Del Monte Produce has an ROCE of 2.6%. In absolute terms, that's a low return and it also under-performs the Food industry average of 9.5%.

See our latest analysis for Fresh Del Monte Produce

Above you can see how the current ROCE for Fresh Del Monte Produce 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 free report on analyst forecasts for the company.

So How Is Fresh Del Monte Produce's ROCE Trending?

In terms of Fresh Del Monte Produce's historical ROCE movements, the trend doesn't inspire confidence. Unfortunately the returns on capital have diminished from the 9.1% that they were earning five years ago. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. If these trends continue, we wouldn't expect Fresh Del Monte Produce to turn into a multi-bagger.

The Bottom Line On Fresh Del Monte Produce's ROCE

In summary, it's unfortunate that Fresh Del Monte Produce is generating lower returns from the same amount of capital. Investors haven't taken kindly to these developments, since the stock has declined 45% from where it was five years ago. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

If you want to continue researching Fresh Del Monte Produce, you might be interested to know about the 2 warning signs that our analysis has discovered.

While Fresh Del Monte Produce 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.

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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.

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