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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after investigating Anheuser-Busch InBev (EBR:ABI), we don't think it's current trends fit the mold of a multi-bagger.
Return On Capital Employed (ROCE): What is it?
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 Anheuser-Busch InBev is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.064 = US$12b ÷ (US$226b - US$32b) (Based on the trailing twelve months to March 2021).
Thus, Anheuser-Busch InBev has an ROCE of 6.4%. In absolute terms, that's a low return and it also under-performs the Beverage industry average of 9.4%.
In the above chart we have measured Anheuser-Busch InBev's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Anheuser-Busch InBev.
What Can We Tell From Anheuser-Busch InBev's ROCE Trend?
In terms of Anheuser-Busch InBev's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 13% over the last five years. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.
The Bottom Line On Anheuser-Busch InBev's ROCE
Bringing it all together, while we're somewhat encouraged by Anheuser-Busch InBev's reinvestment in its own business, we're aware that returns are shrinking. Since the stock has declined 37% over the last five years, investors may not be too optimistic on this trend improving either. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.
Anheuser-Busch InBev does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those doesn't sit too well with us...
While Anheuser-Busch InBev 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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