What Do The Returns On Capital At Ambev (BVMF:ABEV3) Tell Us?

There are a few key trends to look for if we want to identify the next multi-bagger. 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. In light of that, when we looked at Ambev (BVMF:ABEV3) and its ROCE trend, we weren't exactly thrilled.

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

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

0.15 = R$14b ÷ (R$127b - R$30b) (Based on the trailing twelve months to September 2020).

Therefore, Ambev has an ROCE of 15%. On its own, that's a standard return, however it's much better than the 11% generated by the Beverage industry.

See our latest analysis for Ambev

Above you can see how the current ROCE for Ambev compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Ambev.

The Trend Of ROCE

On the surface, the trend of ROCE at Ambev doesn't inspire confidence. Around five years ago the returns on capital were 30%, but since then they've fallen to 15%. 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 may take some time before the company starts to see any change in earnings from these investments.

What We Can Learn From Ambev's ROCE

Bringing it all together, while we're somewhat encouraged by Ambev's reinvestment in its own business, we're aware that returns are shrinking. And investors appear hesitant that the trends will pick up because the stock has fallen 12% in the last five years. Therefore based on the analysis done in this article, we don't think Ambev has the makings of a multi-bagger.

Like most companies, Ambev does come with some risks, and we've found 1 warning sign that you should be aware of.

While Ambev isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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