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. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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. Having said that, from a first glance at China Resources Beer (Holdings) (HKG:291) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
What Is Return On Capital Employed (ROCE)?
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for China Resources Beer (Holdings), this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.099 = CN¥5.0b ÷ (CN¥77b - CN¥26b) (Based on the trailing twelve months to June 2023).
So, China Resources Beer (Holdings) has an ROCE of 9.9%. On its own, that's a low figure but it's around the 12% average generated by the Beverage industry.
In the above chart we have measured China Resources Beer (Holdings)'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 China Resources Beer (Holdings) here for free.
The Trend Of ROCE
The returns on capital haven't changed much for China Resources Beer (Holdings) in recent years. The company has employed 128% more capital in the last five years, and the returns on that capital have remained stable at 9.9%. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.
One more thing to note, even though ROCE has remained relatively flat over the last five years, the reduction in current liabilities to 34% of total assets, is good to see from a business owner's perspective. Effectively suppliers now fund less of the business, which can lower some elements of risk.
The Bottom Line On China Resources Beer (Holdings)'s ROCE
In summary, China Resources Beer (Holdings) has simply been reinvesting capital and generating the same low rate of return as before. And with the stock having returned a mere 4.7% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.
While China Resources Beer (Holdings) doesn't shine too bright in this respect, it's still worth seeing if the company is trading at attractive prices. You can find that out with our FREE intrinsic value estimation on our platform.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
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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.