A Look Into Brown-Forman's (NYSE:BF.B) Impressive Returns On Capital

Did you know there are some financial metrics that can provide clues of a potential 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So, when we ran our eye over Brown-Forman's (NYSE:BF.B) trend of ROCE, we really liked what we saw.

Understanding Return On Capital Employed (ROCE)

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 Brown-Forman:

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

0.23 = US$1.3b ÷ (US$6.9b - US$1.2b) (Based on the trailing twelve months to October 2022).

Thus, Brown-Forman has an ROCE of 23%. In absolute terms that's a great return and it's even better than the Beverage industry average of 14%.

See our latest analysis for Brown-Forman

In the above chart we have measured Brown-Forman's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Does the ROCE Trend For Brown-Forman Tell Us?

We'd be pretty happy with returns on capital like Brown-Forman. The company has consistently earned 23% for the last five years, and the capital employed within the business has risen 43% in that time. With returns that high, it's great that the business can continually reinvest its money at such appealing rates of return. If Brown-Forman can keep this up, we'd be very optimistic about its future.

The Bottom Line On Brown-Forman's ROCE

In the end, the company has proven it can reinvest it's capital at high rates of returns, which you'll remember is a trait of a multi-bagger. In light of this, the stock has only gained 32% over the last five years for shareholders who have owned the stock in this period. So because of the trends we're seeing, we'd recommend looking further into this stock to see if it has the makings of a multi-bagger.

One more thing to note, we've identified 1 warning sign with Brown-Forman and understanding this should be part of your investment process.

High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.

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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.