What Do The Returns On Capital At A.G. BARR (LON:BAG) Tell Us?

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after investigating A.G. BARR (LON:BAG), we don't think it's current trends fit the mold of a multi-bagger.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its 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)

0.17 = UK£41m ÷ (UK£361m - UK£123m) (Based on the trailing twelve months to July 2020).

So, A.G. BARR has an ROCE of 17%. In absolute terms, that's a satisfactory return, but compared to the Beverage industry average of 12% it's much better.

View our latest analysis for A.G. BARR

Above you can see how the current ROCE for A.G. BARR 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 A.G. BARR here for free.

What The Trend Of ROCE Can Tell Us

There hasn't been much to report for A.G. BARR's returns and its level of capital employed because both metrics have been steady for the past five years. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. With that in mind, unless investment picks up again in the future, we wouldn't expect A.G. BARR to be a multi-bagger going forward. With fewer investment opportunities, it makes sense that A.G. BARR has been paying out a decent 51% of its earnings to shareholders. Given the business isn't reinvesting in itself, it makes sense to distribute a portion of earnings among shareholders.

On another note, while the change in ROCE trend might not scream for attention, it's interesting that the current liabilities have actually gone up over the last five years. This is intriguing because if current liabilities hadn't increased to 34% of total assets, this reported ROCE would probably be less than17% because total capital employed would be higher.The 17% ROCE could be even lower if current liabilities weren't 34% of total assets, because the the formula would show a larger base of total capital employed. With that in mind, just be wary if this ratio increases in the future, because if it gets particularly high, this brings with it some new elements of risk.

What We Can Learn From A.G. BARR's ROCE

We can conclude that in regards to A.G. BARR's returns on capital employed and the trends, there isn't much change to report on. Unsurprisingly, the stock has only gained 8.9% over the last five years, which potentially indicates that investors are accounting for this going forward. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

On a separate note, we've found 2 warning signs for A.G. BARR you'll probably want to know about.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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