Allgäuer Brauhaus (MUN:ALB) Is Very Good At Capital Allocation

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Speaking of which, we noticed some great changes in Allgäuer Brauhaus' (MUN:ALB) returns on capital, so let's have a look.

Understanding 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. To calculate this metric for Allgäuer Brauhaus, this is the formula:

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

0.22 = €2.0m ÷ (€19m - €10m) (Based on the trailing twelve months to December 2019).

Thus, Allgäuer Brauhaus has an ROCE of 22%. In absolute terms that's a great return and it's even better than the Beverage industry average of 6.2%.

View our latest analysis for Allgäuer Brauhaus

Historical performance is a great place to start when researching a stock so above you can see the gauge for Allgäuer Brauhaus' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Allgäuer Brauhaus, check out these free graphs here.

How Are Returns Trending?

Allgäuer Brauhaus has not disappointed with their ROCE growth. More specifically, while the company has kept capital employed relatively flat over the last five years, the ROCE has climbed 152% in that same time. So it's likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn't changed considerably. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.

Another thing to note, Allgäuer Brauhaus has a high ratio of current liabilities to total assets of 53%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

What We Can Learn From Allgäuer Brauhaus' ROCE

To sum it up, Allgäuer Brauhaus is collecting higher returns from the same amount of capital, and that's impressive. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

Like most companies, Allgäuer Brauhaus does come with some risks, and we've found 2 warning signs that you should be aware of.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.

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