Royal Unibrew (CPH:RBREW) Could Be Struggling To Allocate Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. Having said that, from a first glance at Royal Unibrew (CPH:RBREW) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Return On Capital Employed (ROCE): What Is It?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its 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)

0.17 = kr.1.5b ÷ (kr.14b - kr.5.5b) (Based on the trailing twelve months to September 2022).

Thus, Royal Unibrew has an ROCE of 17%. On its own, that's a standard return, however it's much better than the 9.4% generated by the Beverage industry.

Check out the opportunities and risks within the XX Beverage industry.

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, you can check out the forecasts from the analysts covering Royal Unibrew here for free.

What Can We Tell From Royal Unibrew's ROCE Trend?

When we looked at the ROCE trend at Royal Unibrew, we didn't gain much confidence. To be more specific, ROCE has fallen from 26% over the last five years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

What We Can Learn From Royal Unibrew's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Royal Unibrew. Furthermore the stock has climbed 55% over the last five years, it would appear that investors are upbeat about the future. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

Royal Unibrew does have some risks, we noticed 5 warning signs (and 1 which shouldn't be ignored) we think you should know about.

While Royal Unibrew 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.