To find a multi-bagger stock, what are the underlying trends we should look for in a business? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So on that note, Big Rock Brewery (TSE:BR) looks quite promising in regards to its trends of return on capital.
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 Big Rock Brewery:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.0022 = CA$106k ÷ (CA$56m - CA$8.1m) (Based on the trailing twelve months to September 2020).
Therefore, Big Rock Brewery has an ROCE of 0.2%. In absolute terms, that's a low return and it also under-performs the Beverage industry average of 13%.
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're interested in investigating Big Rock Brewery's past further, check out this free graph of past earnings, revenue and cash flow.
What Does the ROCE Trend For Big Rock Brewery Tell Us?
We're delighted to see that Big Rock Brewery is reaping rewards from its investments and has now broken into profitability. The company now earns 0.2% on its capital, because five years ago it was incurring losses. Interestingly, the capital employed by the business has remained relatively flat, so these higher returns are either from prior investments paying off or increased efficiencies. With no noticeable increase in capital employed, it's worth knowing what the company plans on doing going forward in regards to reinvesting and growing the business. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.
The Key Takeaway
As discussed above, Big Rock Brewery appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 6.5% to shareholders. So with that in mind, we think the stock deserves further research.
On a final note, we found 2 warning signs for Big Rock Brewery (1 doesn't sit too well with us) 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.
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