Returns Are Gaining Momentum At China Resources Beer (Holdings) (HKG:291)

If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. 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 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 China Resources Beer (Holdings):

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

0.10 = CN¥3.2b ÷ (CN¥53b - CN¥22b) (Based on the trailing twelve months to June 2021).

So, China Resources Beer (Holdings) has an ROCE of 10%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Beverage industry average of 11%.

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

Above you can see how the current ROCE for China Resources Beer (Holdings) 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 report for China Resources Beer (Holdings).

What Can We Tell From China Resources Beer (Holdings)'s ROCE Trend?

The trends we've noticed at China Resources Beer (Holdings) are quite reassuring. The data shows that returns on capital have increased substantially over the last five years to 10%. 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 23%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

Another thing to note, China Resources Beer (Holdings) has a high ratio of current liabilities to total assets of 41%. 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.

Our Take On China Resources Beer (Holdings)'s ROCE

All in all, it's terrific to see that China Resources Beer (Holdings) is reaping the rewards from prior investments and is growing its capital base. Since the stock has returned a staggering 348% 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.

If you want to continue researching China Resources Beer (Holdings), you might be interested to know about the 1 warning sign that our analysis has discovered.

While China Resources Beer (Holdings) 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.