Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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 briefly looking over the numbers, we don't think Compañía Cervecerías Unidas (SNSE:CCU) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
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 Compañía Cervecerías Unidas:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.089 = CL$179b ÷ (CL$2.5t - CL$522b) (Based on the trailing twelve months to December 2020).
Therefore, Compañía Cervecerías Unidas has an ROCE of 8.9%. Even though it's in line with the industry average of 9.0%, it's still a low return by itself.
In the above chart we have measured Compañía Cervecerías Unidas' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Compañía Cervecerías Unidas.
What Does the ROCE Trend For Compañía Cervecerías Unidas Tell Us?
On the surface, the trend of ROCE at Compañía Cervecerías Unidas doesn't inspire confidence. Over the last five years, returns on capital have decreased to 8.9% from 15% five years ago. 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'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.
The Bottom Line On Compañía Cervecerías Unidas' ROCE
In summary, Compañía Cervecerías Unidas is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Unsurprisingly, the stock has only gained 2.4% over the last five years, which potentially indicates that investors are accounting for this going forward. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.
If you'd like to know about the risks facing Compañía Cervecerías Unidas, we've discovered 1 warning sign that you should be aware of.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
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