Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, we've noticed some promising trends at Tsingtao Brewery (HKG:168) so let's look a bit deeper.
Return On Capital Employed (ROCE): What is it?
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. To calculate this metric for Tsingtao Brewery, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.091 = CN¥2.6b ÷ (CN¥45b - CN¥17b) (Based on the trailing twelve months to September 2021).
Therefore, Tsingtao Brewery has an ROCE of 9.1%. In absolute terms, that's a low return but it's around the Beverage industry average of 10%.
In the above chart we have measured Tsingtao Brewery's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
The Trend Of ROCE
While in absolute terms it isn't a high ROCE, it's promising to see that it has been moving in the right direction. Over the last five years, returns on capital employed have risen substantially to 9.1%. The amount of capital employed has increased too, by 39%. So we're very much inspired by what we're seeing at Tsingtao Brewery thanks to its ability to profitably reinvest capital.
What We Can Learn From Tsingtao Brewery's ROCE
All in all, it's terrific to see that Tsingtao Brewery is reaping the rewards from prior investments and is growing its capital base. Since the stock has returned a solid 86% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. In light of that, we think it's worth looking further into this stock because if Tsingtao Brewery can keep these trends up, it could have a bright future ahead.
Like most companies, Tsingtao Brewery does come with some risks, and we've found 2 warning signs that you should be aware of.
While Tsingtao Brewery 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.