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. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Speaking of which, we noticed some great changes in BellRing Brands' (NYSE:BRBR) returns on capital, so let's have a look.
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. The formula for this calculation on BellRing Brands is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.33 = US$166m ÷ (US$654m - US$153m) (Based on the trailing twelve months to September 2020).
Therefore, BellRing Brands has an ROCE of 33%. In absolute terms that's a great return and it's even better than the Personal Products industry average of 15%.
Above you can see how the current ROCE for BellRing Brands compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for BellRing Brands.
What The Trend Of ROCE Can Tell Us
BellRing Brands is showing promise given that its ROCE is trending up and to the right. More specifically, while the company has kept capital employed relatively flat over the last three years, the ROCE has climbed 82% in that same time. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. 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.On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Essentially the business now has suppliers or short-term creditors funding about 23% of its operations, which isn't ideal. It's worth keeping an eye on this because as the percentage of current liabilities to total assets increases, some aspects of risk also increase.
The Bottom Line
In summary, we're delighted to see that BellRing Brands has been able to increase efficiencies and earn higher rates of return on the same amount of capital. Since the stock has returned a solid 7.3% to shareholders over the last year, it's fair to say investors are beginning to recognize these changes. In light of that, we think it's worth looking further into this stock because if BellRing Brands can keep these trends up, it could have a bright future ahead.
If you'd like to know about the risks facing BellRing Brands, we've discovered 1 warning sign that you should be aware of.
If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.
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