Keurig Dr Pepper (NASDAQ:KDP) Is Experiencing Growth In Returns On Capital

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. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So when we looked at Keurig Dr Pepper (NASDAQ:KDP) and its trend of ROCE, we really liked 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. The formula for this calculation on Keurig Dr Pepper is:

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

0.078 = US$3.5b ÷ (US$52b - US$7.5b) (Based on the trailing twelve months to June 2024).

So, Keurig Dr Pepper has an ROCE of 7.8%. In absolute terms, that's a low return and it also under-performs the Beverage industry average of 17%.

Check out our latest analysis for Keurig Dr Pepper

Above you can see how the current ROCE for Keurig Dr Pepper compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Keurig Dr Pepper .

So How Is Keurig Dr Pepper's ROCE Trending?

Keurig Dr Pepper's ROCE growth is quite impressive. More specifically, while the company has kept capital employed relatively flat over the last five years, the ROCE has climbed 58% in that same time. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.

The Bottom Line

To bring it all together, Keurig Dr Pepper has done well to increase the returns it's generating from its capital employed. Since the stock has only returned 38% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.

If you want to know some of the risks facing Keurig Dr Pepper we've found 2 warning signs (1 is a bit unpleasant!) that you should be aware of before investing here.

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.