Returns On Capital Are A Standout For Royal Unibrew (CPH:RBREW)

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, 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. And in light of that, the trends we're seeing at Royal Unibrew's (CPH:RBREW) look very promising so lets take 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 Royal Unibrew:

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

0.30 = kr.1.6b ÷ (kr.9.1b - kr.3.8b) (Based on the trailing twelve months to June 2021).

Thus, Royal Unibrew has an ROCE of 30%. That's a fantastic return and not only that, it outpaces the average of 9.1% earned by companies in a similar industry.

Check out our latest analysis for Royal Unibrew

In the above chart we have measured Royal Unibrew's 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 Royal Unibrew.

What Does the ROCE Trend For Royal Unibrew Tell Us?

Royal Unibrew is displaying some positive trends. Over the last five years, returns on capital employed have risen substantially to 30%. Basically the business is earning more per dollar of capital invested and in addition to that, 30% more capital is being employed now too. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

On a side note, Royal Unibrew's current liabilities are still rather high at 42% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line

All in all, it's terrific to see that Royal Unibrew is reaping the rewards from prior investments and is growing its capital base. Since the stock has returned a staggering 170% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it's worth looking further into this stock because if Royal Unibrew can keep these trends up, it could have a bright future ahead.

If you want to continue researching Royal Unibrew, you might be interested to know about the 2 warning signs that our analysis has discovered.

Royal Unibrew is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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.

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