What are the early trends we should look for to identify a stock that could 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. With that in mind, we've noticed some promising trends at Olam Group (SGX:VC2) so let's look a bit deeper.

Return On Capital Employed (ROCE): What Is It?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Olam Group:

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

0.087 = S$1.9b ÷ (S$43b - S$22b) (Based on the trailing twelve months to June 2024).

Therefore, Olam Group has an ROCE of 8.7%. In absolute terms, that's a low return but it's around the Consumer Retailing industry average of 7.8%.

View our latest analysis for Olam Group

Historical performance is a great place to start when researching a stock so above you can see the gauge for Olam Group's ROCE against it's prior returns. If you're interested in investigating Olam Group's past further, check out this free graph covering Olam Group's past earnings, revenue and cash flow.

How Are Returns Trending?

We're glad to see that ROCE is heading in the right direction, even if it is still low at the moment. Over the last five years, returns on capital employed have risen substantially to 8.7%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 54%. So we're very much inspired by what we're seeing at Olam Group thanks to its ability to profitably reinvest capital.

Another thing to note, Olam Group has a high ratio of current liabilities to total assets of 50%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Olam Group has. And since the stock has fallen 15% over the last five years, there might be an opportunity here. So researching this company further and determining whether or not these trends will continue seems justified.

On a final note, we've found 3 warning signs for Olam Group that we think you should be aware of.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.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.