Stock Analysis

The Returns At Constellation Brands (NYSE:STZ) Aren't Growing

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NYSE:STZ
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If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. 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. With that in mind, the ROCE of Constellation Brands (NYSE:STZ) looks decent, right now, so lets see what the trend of returns can tell us.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Constellation Brands:

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

0.14 = US$3.1b ÷ (US$24b - US$2.7b) (Based on the trailing twelve months to November 2022).

Thus, Constellation Brands has an ROCE of 14%. By itself that's a normal return on capital and it's in line with the industry's average returns of 14%.

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roce
NYSE:STZ Return on Capital Employed January 31st 2023

In the above chart we have measured Constellation Brands' 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 Constellation Brands.

So How Is Constellation Brands' ROCE Trending?

While the returns on capital are good, they haven't moved much. The company has employed 24% more capital in the last five years, and the returns on that capital have remained stable at 14%. Since 14% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.

Our Take On Constellation Brands' ROCE

In the end, Constellation Brands has proven its ability to adequately reinvest capital at good rates of return. And given the stock has only risen 12% over the last five years, we'd suspect the market is beginning to recognize these trends. 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.

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

While Constellation Brands 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.

What are the risks and opportunities for Constellation Brands?

Constellation Brands, Inc., together with its subsidiaries, produces, imports, markets, and sells beer, wine, and spirits in the United States, Canada, Mexico, New Zealand, and Italy.

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Rewards

  • Trading at 29.7% below our estimate of its fair value

  • Earnings are forecast to grow 30.05% per year

  • Became profitable this year

Risks

  • Has a high level of debt

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Constellation Brands

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