Capital Allocation Trends At Monster Beverage (NASDAQ:MNST) Aren't Ideal

There are a few key trends to look for if we want to identify the next multi-bagger. 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. Having said that, while the ROCE is currently high for Monster Beverage (NASDAQ:MNST), we aren't jumping out of our chairs because returns are decreasing.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Monster Beverage:

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

0.22 = US$1.8b ÷ (US$9.3b - US$1.2b) (Based on the trailing twelve months to June 2023).

Therefore, Monster Beverage has an ROCE of 22%. That's a fantastic return and not only that, it outpaces the average of 16% earned by companies in a similar industry.

Check out our latest analysis for Monster Beverage

In the above chart we have measured Monster Beverage's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Monster Beverage.

What Can We Tell From Monster Beverage's ROCE Trend?

In terms of Monster Beverage's historical ROCE movements, the trend isn't fantastic. Historically returns on capital were even higher at 32%, but they have dropped over the last five years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

The Bottom Line

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Monster Beverage. And the stock has followed suit returning a meaningful 89% to shareholders over the last five years. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

Like most companies, Monster Beverage does come with some risks, and we've found 1 warning sign that you should be aware of.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.

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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.