What trends should we look for it we want to identify stocks that can multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Speaking of which, we noticed some great changes in Carlsberg's (CPH:CARL B) 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. Analysts use this formula to calculate it for Carlsberg:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.11 = kr.9.6b ÷ (kr.124b - kr.33b) (Based on the trailing twelve months to June 2020).
Thus, Carlsberg has an ROCE of 11%. That's a relatively normal return on capital, and it's around the 9.1% generated by the Beverage industry.
Above you can see how the current ROCE for Carlsberg 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 Carlsberg here for free.
How Are Returns Trending?
Carlsberg has not disappointed in regards to ROCE growth. We found that the returns on capital employed over the last five years have risen by 51%. The company is now earning kr.0.1 per dollar of capital employed. Interestingly, the business may be becoming more efficient because it's applying 22% less capital than it was five years ago. If this trend continues, the business might be getting more efficient but it's shrinking in terms of total assets.
The Bottom Line On Carlsberg's ROCE
In a nutshell, we're pleased to see that Carlsberg has been able to generate higher returns from less capital. Since the stock has returned a solid 86% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.
On a final note, we've found 1 warning sign for Carlsberg that we think you should be aware of.
While Carlsberg 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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