Allgäuer Brauhaus (MUN:ALB) May Have Issues Allocating Its Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. However, after investigating Allgäuer Brauhaus (MUN:ALB), we don't think it's current trends fit the mold of a multi-bagger.

We've discovered 3 warning signs about Allgäuer Brauhaus. View them for free.

What Is 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 Allgäuer Brauhaus, this is the formula:

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

0.026 = €308k ÷ (€35m - €23m) (Based on the trailing twelve months to December 2023).

Thus, Allgäuer Brauhaus has an ROCE of 2.6%. Ultimately, that's a low return and it under-performs the Beverage industry average of 8.7%.

Check out our latest analysis for Allgäuer Brauhaus

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 want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Allgäuer Brauhaus.

How Are Returns Trending?

On the surface, the trend of ROCE at Allgäuer Brauhaus doesn't inspire confidence. Over the last five years, returns on capital have decreased to 2.6% from 20% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a side note, Allgäuer Brauhaus' current liabilities have increased over the last five years to 66% of total assets, effectively distorting the ROCE to some degree. Without this increase, it's likely that ROCE would be even lower than 2.6%. What this means is that in reality, a rather large portion of the business is being funded by the likes of the company's suppliers or short-term creditors, which can bring some risks of its own.

The Key Takeaway

In summary, despite lower returns in the short term, we're encouraged to see that Allgäuer Brauhaus is reinvesting for growth and has higher sales as a result. These growth trends haven't led to growth returns though, since the stock has fallen 37% over the last five years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

If you'd like to know more about Allgäuer Brauhaus, we've spotted 3 warning signs, and 1 of them can't be ignored.

While Allgäuer Brauhaus isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.