There are a few key trends to look for if we want to identify the next multi-bagger. 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. 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?
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 Big Rock Brewery is:
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).
Thus, 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 14%.
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 Can We Tell From Big Rock Brewery's ROCE Trend?
Shareholders will be relieved that Big Rock Brewery has broken into profitability. While the business was unprofitable in the past, it's now turned things around and is earning 0.2% on its capital. While returns have increased, the amount of capital employed by Big Rock Brewery has remained flat over the period. That being said, while an increase in efficiency is no doubt appealing, it'd be helpful to know if the company does have any investment plans going forward. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.
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. Since the total return from the stock has been almost flat over the last five years, there might be an opportunity here if the valuation looks good. With that in mind, we believe the promising trends warrant this stock for further investigation.
One final note, you should learn about the 3 warning signs we've spotted with Big Rock Brewery (including 1 which is can't be ignored) .
While Big Rock Brewery 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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