Varun Beverages (NSE:VBL) Is Very Good At Capital Allocation

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding 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. So when we looked at the ROCE trend of Varun Beverages (NSE:VBL) we really liked what we saw.

Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Varun Beverages is:

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

0.30 = ₹28b ÷ (₹134b - ₹43b) (Based on the trailing twelve months to June 2023).

Therefore, Varun Beverages has an ROCE of 30%. In absolute terms that's a great return and it's even better than the Beverage industry average of 17%.

View our latest analysis for Varun Beverages

Above you can see how the current ROCE for Varun Beverages 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 Varun Beverages here for free.

So How Is Varun Beverages' ROCE Trending?

The trends we've noticed at Varun Beverages are quite reassuring. The data shows that returns on capital have increased substantially over the last five years to 30%. Basically the business is earning more per dollar of capital invested and in addition to that, 132% more capital is being employed now too. So we're very much inspired by what we're seeing at Varun Beverages thanks to its ability to profitably reinvest capital.

What We Can Learn From Varun Beverages' ROCE

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Varun Beverages has. Since the stock has returned a staggering 674% 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 Varun Beverages can keep these trends up, it could have a bright future ahead.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for Varun Beverages (of which 1 makes us a bit uncomfortable!) that you should know about.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning 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.