Compañía Cervecerías Unidas (SNSE:CCU) May Have Issues Allocating Its Capital

There are a few key trends to look for if we want to identify the next multi-bagger. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. 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 Compañía Cervecerías Unidas (SNSE:CCU), we don't think it's current trends fit the mold of a multi-bagger.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Compañía Cervecerías Unidas is:

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

0.081 = CL$218b ÷ (CL$3.4t - CL$713b) (Based on the trailing twelve months to March 2023).

So, Compañía Cervecerías Unidas has an ROCE of 8.1%. On its own that's a low return on capital but it's in line with the industry's average returns of 8.1%.

View our latest analysis for Compañía Cervecerías Unidas

Above you can see how the current ROCE for Compañía Cervecerías Unidas compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Compañía Cervecerías Unidas here for free.

SWOT Analysis for Compañía Cervecerías Unidas

How Are Returns Trending?

When we looked at the ROCE trend at Compañía Cervecerías Unidas, we didn't gain much confidence. Around five years ago the returns on capital were 16%, but since then they've fallen to 8.1%. 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's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

What We Can Learn From Compañía Cervecerías Unidas' ROCE

Bringing it all together, while we're somewhat encouraged by Compañía Cervecerías Unidas' reinvestment in its own business, we're aware that returns are shrinking. Unsurprisingly, the stock has only gained 3.4% over the last five years, which potentially indicates that investors are accounting for this going forward. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

One final note, you should learn about the 3 warning signs we've spotted with Compañía Cervecerías Unidas (including 2 which shouldn't be ignored) .

While Compañía Cervecerías Unidas 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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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.