China Resources Beer (Holdings)'s (HKG:291) Returns On Capital Are Heading Higher

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. So on that note, China Resources Beer (Holdings) (HKG:291) looks quite promising in regards to its trends of return on capital.

What is 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. Analysts use this formula to calculate it for China Resources Beer (Holdings):

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

0.087 = CN¥2.1b ÷ (CN¥44b - CN¥20b) (Based on the trailing twelve months to December 2020).

Therefore, China Resources Beer (Holdings) has an ROCE of 8.7%. Even though it's in line with the industry average of 9.5%, it's still a low return by itself.

Check out our latest analysis for China Resources Beer (Holdings)

In the above chart we have measured China Resources Beer (Holdings)'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 China Resources Beer (Holdings) here for free.

How Are Returns Trending?

China Resources Beer (Holdings) is showing promise given that its ROCE is trending up and to the right. The figures show that over the last five years, ROCE has grown 73% whilst employing roughly the same amount of capital. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.

Another thing to note, China Resources Beer (Holdings) has a high ratio of current liabilities to total assets of 45%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Key Takeaway

To bring it all together, China Resources Beer (Holdings) has done well to increase the returns it's generating from its capital employed. Since the stock has returned a staggering 341% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it's worth looking further into this stock because if China Resources Beer (Holdings) can keep these trends up, it could have a bright future ahead.

While China Resources Beer (Holdings) looks impressive, no company is worth an infinite price. The intrinsic value infographic in our free research report helps visualize whether 291 is currently trading for a fair price.

While China Resources Beer (Holdings) isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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This article by Simply Wall St is general in nature. 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.
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