British American Tobacco's (LON:BATS) Returns On Capital Are Heading Higher

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So on that note, British American Tobacco (LON:BATS) looks quite promising in regards to its trends of return on capital.

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. The formula for this calculation on British American Tobacco is:

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

0.11 = UK£11b ÷ (UK£119b - UK£18b) (Based on the trailing twelve months to June 2024).

Thus, British American Tobacco has an ROCE of 11%. In isolation, that's a pretty standard return but against the Tobacco industry average of 18%, it's not as good.

Check out our latest analysis for British American Tobacco

Above you can see how the current ROCE for British American Tobacco compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for British American Tobacco .

What The Trend Of ROCE Can Tell Us

We're pretty happy with how the ROCE has been trending at British American Tobacco. The figures show that over the last five years, returns on capital have grown by 39%. That's not bad because this tells for every dollar invested (capital employed), the company is increasing the amount earned from that dollar. Speaking of capital employed, the company is actually utilizing 21% less than it was five years ago, which can be indicative of a business that's improving its efficiency. British American Tobacco may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.

The Bottom Line On British American Tobacco's ROCE

In summary, it's great to see that British American Tobacco has been able to turn things around and earn higher returns on lower amounts of capital. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 44% return over the last five years. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

British American Tobacco does have some risks though, and we've spotted 2 warning signs for British American Tobacco that you might be interested in.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.