Should You Be Impressed By United Spirits' (NSE:MCDOWELL-N) Returns on Capital?

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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. That's why when we briefly looked at United Spirits' (NSE:MCDOWELL-N) ROCE trend, we were pretty happy with what we saw.

Return On Capital Employed (ROCE): What is it?

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 United Spirits:

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

0.15 = ₹5.7b ÷ (₹90b - ₹52b) (Based on the trailing twelve months to September 2020).

Therefore, United Spirits has an ROCE of 15%. That's a relatively normal return on capital, and it's around the 13% generated by the Beverage industry.

See our latest analysis for United Spirits

Above you can see how the current ROCE for United Spirits compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering United Spirits here for free.

So How Is United Spirits' ROCE Trending?

The trend of ROCE doesn't stand out much, but returns on a whole are decent. Over the past five years, ROCE has remained relatively flat at around 15% and the business has deployed 67% more capital into its operations. Since 15% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.

On a side note, United Spirits has done well to reduce current liabilities to 59% of total assets over the last five years. Effectively suppliers now fund less of the business, which can lower some elements of risk. Although because current liabilities are still 59%, some of that risk is still prevalent.

What We Can Learn From United Spirits' ROCE

In the end, United Spirits has proven its ability to adequately reinvest capital at good rates of return. And given the stock has only risen 19% over the last five years, we'd suspect the market is beginning to recognize these trends. So because of the trends we're seeing, we'd recommend looking further into this stock to see if it has the makings of a multi-bagger.

On a final note, we found 2 warning signs for United Spirits (1 is a bit unpleasant) you should be aware of.

While United Spirits 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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