If you’re not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Typically, we’ll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it’s a business that is reinvesting profits at increasing rates of return. So when we looked at Corby Spirit and Wine (TSE:CSW.A) and its trend of ROCE, we really liked what we saw.
Understanding Return On Capital Employed (ROCE)
For those who don’t know, ROCE is a measure of a company’s yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Corby Spirit and Wine, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.18 = CA$35m ÷ (CA$234m – CA$40m) (Based on the trailing twelve months to June 2020).
So, Corby Spirit and Wine has an ROCE of 18%. In absolute terms, that’s a satisfactory return, but compared to the Beverage industry average of 14% it’s much better.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Corby Spirit and Wine’s ROCE against it’s prior returns. If you’re interested in investigating Corby Spirit and Wine’s past further, check out this free graph of past earnings, revenue and cash flow.
What Can We Tell From Corby Spirit and Wine’s ROCE Trend?
Corby Spirit and Wine’s ROCE growth is quite impressive. The figures show that over the last five years, ROCE has grown 45% whilst employing roughly the same amount of capital. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. On that front, things are looking good so it’s worth exploring what management has said about growth plans going forward.
The Bottom Line
In summary, we’re delighted to see that Corby Spirit and Wine has been able to increase efficiencies and earn higher rates of return on the same amount of capital. Considering the stock has delivered 4.3% to its stockholders over the last five years, it may be fair to think that investors aren’t fully aware of the promising trends yet. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.
On a final note, we’ve found 1 warning sign for Corby Spirit and Wine that we think 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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This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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