Allgäuer Brauhaus (MUN:ALB) Might Have The Makings Of A Multi-Bagger

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. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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)

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)

0.15 = €1.5m ÷ (€22m - €12m) (Based on the trailing twelve months to December 2020).

Thus, Allgäuer Brauhaus has an ROCE of 15%. On its own, that's a standard return, however it's much better than the 7.4% generated by the Beverage industry.

Check out 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're interested in investigating Allgäuer Brauhaus' past further, check out this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

The fact that Allgäuer Brauhaus is now generating some pre-tax profits from its prior investments is very encouraging. The company was generating losses five years ago, but now it's earning 15% which is a sight for sore eyes. And unsurprisingly, like most companies trying to break into the black, Allgäuer Brauhaus is utilizing 39% more capital than it was five years ago. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

One more thing to note, Allgäuer Brauhaus has decreased current liabilities to 56% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. So this improvement in ROCE has come from the business' underlying economics, which is great to see. Nevertheless, there are some potential risks the company is bearing with current liabilities that high, so just keep that in mind.

The Key Takeaway

Long story short, we're delighted to see that Allgäuer Brauhaus' reinvestment activities have paid off and the company is now profitable. And with a respectable 80% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 6 warning signs for Allgäuer Brauhaus (of which 3 are potentially serious!) that you should know about.

While Allgäuer Brauhaus may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.