Suntory Beverage & Food's (TSE:2587) Returns Have Hit A Wall

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, the ROCE of Suntory Beverage & Food (TSE:2587) looks decent, right now, so lets see what the trend of returns can tell us.

Understanding 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 Suntory Beverage & Food:

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

0.11 = JP¥146b ÷ (JP¥1.9t - JP¥536b) (Based on the trailing twelve months to December 2023).

Thus, Suntory Beverage & Food has an ROCE of 11%. In absolute terms, that's a satisfactory return, but compared to the Beverage industry average of 7.1% it's much better.

View our latest analysis for Suntory Beverage & Food

In the above chart we have measured Suntory Beverage & Food's 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 Suntory Beverage & Food for free.

What Can We Tell From Suntory Beverage & Food's ROCE Trend?

While the returns on capital are good, they haven't moved much. Over the past five years, ROCE has remained relatively flat at around 11% and the business has deployed 25% more capital into its operations. Since 11% 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.

The Bottom Line On Suntory Beverage & Food's ROCE

The main thing to remember is that Suntory Beverage & Food has proven its ability to continually reinvest at respectable rates of return. And given the stock has only risen 12% over the last five years, we'd suspect the market is beginning to recognize these trends. So to determine if Suntory Beverage & Food is a multi-bagger going forward, we'd suggest digging deeper into the company's other fundamentals.

Suntory Beverage & Food could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation for 2587 on our platform quite valuable.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.