Will a2 Milk (NZSE:ATM) Become A Multi-Bagger?

Simply Wall St

Mon, November 30, 2020, 1:03 AM GMT+11·3 min read

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. With that in mind, the ROCE of a2 Milk (NZSE:ATM) looks great, so lets see what the trend can tell us.

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. The formula for this calculation on a2 Milk is:

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

0.48 = NZ$548m ÷ (NZ$1.5b - NZ$305m) (Based on the trailing twelve months to June 2020).

Thus, a2 Milk has an ROCE of 48%. In absolute terms that's a great return and it's even better than the Food industry average of 7.1%.

View our latest analysis for a2 Milk

roce

In the above chart we have measured a2 Milk's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Can We Tell From a2 Milk's ROCE Trend?

a2 Milk is displaying some positive trends. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 48%. The amount of capital employed has increased too, by 1,782%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 21%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance.

The Bottom Line

To sum it up, a2 Milk has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.