There Are Reasons To Feel Uneasy About Kopparbergs Bryggeri's (NGM:KOBR B) Returns On Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Looking at Kopparbergs Bryggeri (NGM:KOBR B), it does have a high ROCE right now, but lets see how returns are trending.

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 Kopparbergs Bryggeri:

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

0.25 = kr242m ÷ (kr1.9b - kr927m) (Based on the trailing twelve months to December 2020).

So, Kopparbergs Bryggeri has an ROCE of 25%. That's a fantastic return and not only that, it outpaces the average of 9.1% earned by companies in a similar industry.

See our latest analysis for Kopparbergs Bryggeri

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of Kopparbergs Bryggeri, check out these free graphs here.

The Trend Of ROCE

On the surface, the trend of ROCE at Kopparbergs Bryggeri doesn't inspire confidence. While it's comforting that the ROCE is high, five years ago it was 43%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

On a side note, Kopparbergs Bryggeri's current liabilities are still rather high at 49% of total assets. 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. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

What We Can Learn From Kopparbergs Bryggeri's ROCE

In summary, Kopparbergs Bryggeri is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And investors may be recognizing these trends since the stock has only returned a total of 2.5% to shareholders over the last five years. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

One more thing: We've identified 2 warning signs with Kopparbergs Bryggeri (at least 1 which doesn't sit too well with us) , and understanding them would certainly be useful.

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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