Should You Be Impressed By G.M. Breweries' (NSE:GMBREW) Returns on Capital?

There are a few key trends to look for if we want to identify the next multi-bagger. 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after briefly looking over the numbers, we don't think G.M. Breweries (NSE:GMBREW) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding 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 G.M. Breweries:

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

0.13 = ₹594m ÷ (₹4.9b - ₹440m) (Based on the trailing twelve months to December 2020).

So, G.M. Breweries has an ROCE of 13%. That's a pretty standard return and it's in line with the industry average of 13%.

View our latest analysis for G.M. Breweries

Historical performance is a great place to start when researching a stock so above you can see the gauge for G.M. Breweries' ROCE against it's prior returns. If you'd like to look at how G.M. Breweries has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at G.M. Breweries, we didn't gain much confidence. To be more specific, ROCE has fallen from 41% over the last five years. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

On a side note, G.M. Breweries has done well to pay down its current liabilities to 9.1% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Bottom Line On G.M. Breweries' ROCE

In summary, we're somewhat concerned by G.M. Breweries' diminishing returns on increasing amounts of capital. Investors haven't taken kindly to these developments, since the stock has declined 25% from where it was five years ago. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

G.M. Breweries could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation on our platform quite valuable.

While G.M. Breweries 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. 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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