Stock Analysis

A.G. BARR (LON:BAG) May Have Issues Allocating Its Capital

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LSE:BAG
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To find a multi-bagger stock, what are the underlying trends we should look for in a business? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after briefly looking over the numbers, we don't think A.G. BARR (LON:BAG) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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

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. The formula for this calculation on A.G. BARR is:

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

0.15 = UK£44m ÷ (UK£355m - UK£66m) (Based on the trailing twelve months to July 2022).

Thus, A.G. BARR has an ROCE of 15%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Beverage industry average of 14%.

View our latest analysis for A.G. BARR

roce
LSE:BAG Return on Capital Employed September 30th 2022

In the above chart we have measured A.G. BARR'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 A.G. BARR.

What Does the ROCE Trend For A.G. BARR Tell Us?

When we looked at the ROCE trend at A.G. BARR, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 15% 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. If these investments prove successful, this can bode very well for long term stock performance.

The Bottom Line

In summary, despite lower returns in the short term, we're encouraged to see that A.G. BARR 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 22% over the last five years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

If you want to continue researching A.G. BARR, you might be interested to know about the 1 warning sign that our analysis has discovered.

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

Valuation is complex, but we're helping make it simple.

Find out whether A.G. BARR is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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About LSE:BAG

A.G. BARR

A.G. BARR p.l.c., together with its subsidiaries, manufactures, distributes, and sells soft drinks and cocktail solutions in the United Kingdom and internationally.

The Snowflake is a visual investment summary with the score of each axis being calculated by 6 checks in 5 areas.

Analysis AreaScore (0-6)
Valuation3
Future Growth2
Past Performance3
Financial Health6
Dividends4

Read more about these checks in the individual report sections or in our analysis model.

Flawless balance sheet average dividend payer.