Here's What's Concerning About Brown-Forman's (NYSE:BF.B) Returns On Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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. In light of that, when we looked at Brown-Forman (NYSE:BF.B) and its ROCE trend, we weren't exactly thrilled.

What Is 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)

0.18 = US$1.1b ÷ (US$7.8b - US$1.9b) (Based on the trailing twelve months to January 2023).

Thus, Brown-Forman has an ROCE of 18%. In absolute terms, that's a satisfactory return, but compared to the Beverage industry average of 15% it's much better.

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'd like, you can check out the forecasts from the analysts covering Brown-Forman here for free.

SWOT Analysis for Brown-Forman

So How Is Brown-Forman's ROCE Trending?

On the surface, the trend of ROCE at Brown-Forman doesn't inspire confidence. Around five years ago the returns on capital were 31%, but since then they've fallen to 18%. 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.

The Bottom Line On Brown-Forman's ROCE

While returns have fallen for Brown-Forman in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. In light of this, the stock has only gained 22% over the last five years. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.

If you'd like to know about the risks facing Brown-Forman, we've discovered 1 warning sign that you should be aware of.

While Brown-Forman may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list 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.