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We're Watching These Trends At Farmmi (NASDAQ:FAMI)

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If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding 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. Having said that, from a first glance at Farmmi (NASDAQ:FAMI) 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)

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. To calculate this metric for Farmmi, this is the formula:

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

0.14 = US$3.0m ÷ (US$30m - US$8.1m) (Based on the trailing twelve months to September 2019).

So, Farmmi has an ROCE of 14%. On its own, that's a standard return, however it's much better than the 9.5% generated by the Food industry.

Check out our latest analysis for Farmmi

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roce

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of Farmmi, check out these free graphs here.

What Does the ROCE Trend For Farmmi Tell Us?

On the surface, the trend of ROCE at Farmmi doesn't inspire confidence. Over the last four years, returns on capital have decreased to 14% from 59% four years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a related note, Farmmi has decreased its current liabilities to 27% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. 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.

Our Take On Farmmi's ROCE

To conclude, we've found that Farmmi is reinvesting in the business, but returns have been falling. And investors appear hesitant that the trends will pick up because the stock has fallen 50% in the last year. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

If you want to know some of the risks facing Farmmi we've found 5 warning signs (2 shouldn't be ignored!) that you should be aware of before investing here.

While Farmmi 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.

This article by Simply Wall St is general in nature. 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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