Kopparbergs Bryggeri (NGM:KOBR B) Might Be Having Difficulty Using Its Capital Effectively

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. So when we looked at Kopparbergs Bryggeri (NGM:KOBR B), they do have a high ROCE, but we weren't exactly elated from how returns are trending.

What Is 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. The formula for this calculation on Kopparbergs Bryggeri is:

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

0.22 = kr219m ÷ (kr2.0b - kr1.0b) (Based on the trailing twelve months to June 2022).

Thus, Kopparbergs Bryggeri has an ROCE of 22%. In absolute terms that's a great return and it's even better than the Beverage industry average of 9.9%.

View our latest analysis for Kopparbergs Bryggeri

Historical performance is a great place to start when researching a stock so above you can see the gauge for Kopparbergs Bryggeri's ROCE against it's prior returns. If you'd like to look at how Kopparbergs Bryggeri 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 Kopparbergs Bryggeri, we didn't gain much confidence. To be more specific, while the ROCE is still high, it's fallen from 38% where it was five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

Another thing to note, Kopparbergs Bryggeri has a high ratio of current liabilities to total assets of 51%. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

Our Take On Kopparbergs Bryggeri's ROCE

While returns have fallen for Kopparbergs Bryggeri in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And there could be an opportunity here if other metrics look good too, because the stock has declined 18% in the last five years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

One final note, you should learn about the 2 warning signs we've spotted with Kopparbergs Bryggeri (including 1 which is a bit unpleasant) .

Kopparbergs Bryggeri is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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.