Varun Beverages (NSE:VBL) Has More To Do To Multiply In Value Going Forward

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. 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. 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 Varun Beverages' (NSE:VBL) ROCE trend, we were pretty happy with what we saw.

What is 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. To calculate this metric for Varun Beverages, this is the formula:

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

0.18 = ₹12b ÷ (₹96b - ₹30b) (Based on the trailing twelve months to December 2021).

So, Varun Beverages has an ROCE of 18%. On its own, that's a standard return, however it's much better than the 13% generated by the Beverage industry.

View our latest analysis for Varun Beverages

In the above chart we have measured Varun Beverages' 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 Varun Beverages here for free.

What Does the ROCE Trend For Varun Beverages Tell Us?

While the returns on capital are good, they haven't moved much. The company has employed 111% more capital in the last five years, and the returns on that capital have remained stable at 18%. Since 18% 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.

Our Take On Varun Beverages' ROCE

In the end, Varun Beverages has proven its ability to adequately reinvest capital at good rates of return. And long term investors would be thrilled with the 406% return they've received over the last five years. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.

On a final note, we've found 1 warning sign for Varun Beverages that we think you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.