Returns On Capital At British American Tobacco (LON:BATS) Have Stalled

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after briefly looking over the numbers, we don't think British American Tobacco (LON:BATS) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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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 British American Tobacco:

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

0.098 = UK£9.8b ÷ (UK£119b - UK£19b) (Based on the trailing twelve months to December 2024).

Thus, British American Tobacco has an ROCE of 9.8%. In absolute terms, that's a low return and it also under-performs the Tobacco industry average of 13%.

See our latest analysis for British American Tobacco

In the above chart we have measured British American Tobacco'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 British American Tobacco for free.

The Trend Of ROCE

Over the past five years, British American Tobacco's ROCE and capital employed have both remained mostly flat. This tells us the company isn't reinvesting in itself, so it's plausible that it's past the growth phase. With that in mind, unless investment picks up again in the future, we wouldn't expect British American Tobacco to be a multi-bagger going forward. That probably explains why British American Tobacco has been paying out 66% of its earnings as dividends to shareholders. If the company is in fact lacking growth opportunities, that's one of the viable alternatives for the money.

Our Take On British American Tobacco's ROCE

We can conclude that in regards to British American Tobacco's returns on capital employed and the trends, there isn't much change to report on. Although the market must be expecting these trends to improve because the stock has gained 53% over the last five years. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

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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.