Yahoo Finance Brown-Forman (NYSE:BF.B) Will Want To Turn Around Its Return Trends
If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. In light of that, when we looked at Brown-Forman (NYSE:BF.B) and its ROCE trend, we weren't exactly thrilled.
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. The formula for this calculation on Brown-Forman is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.18 = US$1.1b ÷ (US$7.8b - US$1.9b) (Based on the trailing twelve months to January 2023).
Therefore, Brown-Forman has an ROCE of 18%. On its own, that's a standard return, however it's much better than the 15% generated by the Beverage industry.
View our latest analysis for Brown-Forman
In the above chart we have measured Brown-Forman'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 Brown-Forman here for free.
The Trend Of ROCE
In terms of Brown-Forman's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 31% over the last five years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.
The Bottom Line On Brown-Forman's ROCE
While returns have fallen for Brown-Forman in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. In light of this, the stock has only gained 26% over the last five years. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.
One more thing, we've spotted 1 warning sign facing Brown-Forman that you might find interesting.
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.
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