BellRing Brands (NYSE:BRBR) Knows How To Allocate Capital Effectively

There are a few key trends to look for if we want to identify the next multi-bagger. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. And in light of that, the trends we're seeing at BellRing Brands' (NYSE:BRBR) look very promising so lets take a look.

Return On Capital Employed (ROCE): What is it?

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. The formula for this calculation on BellRing Brands is:

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

0.46 = US$203m ÷ (US$697m - US$251m) (Based on the trailing twelve months to September 2021).

Thus, BellRing Brands has an ROCE of 46%. That's a fantastic return and not only that, it outpaces the average of 20% earned by companies in a similar industry.

View our latest analysis for BellRing Brands

roce

In the above chart we have measured BellRing Brands' prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

The Trend Of ROCE

BellRing Brands' ROCE growth is quite impressive. The figures show that over the last four years, ROCE has grown 150% whilst employing roughly the same amount of capital. So it's likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn't changed considerably. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. The current liabilities has increased to 36% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. Keep an eye out for future increases because when the ratio of current liabilities to total assets gets particularly high, this can introduce some new risks for the business.

In Conclusion...

To sum it up, BellRing Brands is collecting higher returns from the same amount of capital, and that's impressive. 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. So researching this company further and determining whether or not these trends will continue seems justified.

BellRing Brands does have some risks, we noticed 4 warning signs (and 1 which doesn't sit too well with us) we think you should know about.

BellRing Brands is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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.