What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. With that in mind, the ROCE of Eastroc Beverage(Group) (SHSE:605499) looks great, so lets see what the trend can tell us.
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 Eastroc Beverage(Group):
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.35 = CN¥2.2b ÷ (CN¥15b - CN¥8.5b) (Based on the trailing twelve months to September 2023).
Therefore, Eastroc Beverage(Group) has an ROCE of 35%. In absolute terms that's a great return and it's even better than the Beverage industry average of 12%.
Above you can see how the current ROCE for Eastroc Beverage(Group) compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Eastroc Beverage(Group) for free.
What Does the ROCE Trend For Eastroc Beverage(Group) Tell Us?
Eastroc Beverage(Group) is displaying some positive trends. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 35%. The amount of capital employed has increased too, by 465%. So we're very much inspired by what we're seeing at Eastroc Beverage(Group) thanks to its ability to profitably reinvest capital.
Another thing to note, Eastroc Beverage(Group) has a high ratio of current liabilities to total assets of 58%. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.
In Conclusion...
To sum it up, Eastroc Beverage(Group) has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Since the total return from the stock has been almost flat over the last year, there might be an opportunity here if the valuation looks good. That being the case, research into the company's current valuation metrics and future prospects seems fitting.
Eastroc Beverage(Group) does have some risks though, and we've spotted 1 warning sign for Eastroc Beverage(Group) that you might be interested in.
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.