Returns On Capital Are Showing Encouraging Signs At San Miguel Brewery Hong Kong (HKG:236)

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. Speaking of which, we noticed some great changes in San Miguel Brewery Hong Kong's (HKG:236) returns on capital, so let's have a look.

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. Analysts use this formula to calculate it for San Miguel Brewery Hong Kong:

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

0.069 = HK$50m ÷ (HK$827m - HK$95m) (Based on the trailing twelve months to June 2024).

Therefore, San Miguel Brewery Hong Kong has an ROCE of 6.9%. Ultimately, that's a low return and it under-performs the Beverage industry average of 11%.

See our latest analysis for San Miguel Brewery Hong Kong

Historical performance is a great place to start when researching a stock so above you can see the gauge for San Miguel Brewery Hong Kong's ROCE against it's prior returns. If you're interested in investigating San Miguel Brewery Hong Kong's past further, check out this free graph covering San Miguel Brewery Hong Kong's past earnings, revenue and cash flow.

How Are Returns Trending?

We're glad to see that ROCE is heading in the right direction, even if it is still low at the moment. The data shows that returns on capital have increased substantially over the last five years to 6.9%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 24%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

The Key Takeaway

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what San Miguel Brewery Hong Kong has. Since the stock has only returned 0.9% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.

If you want to continue researching San Miguel Brewery Hong Kong, you might be interested to know about the 2 warning signs that our analysis has discovered.

While San Miguel Brewery Hong Kong 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.