Australia markets open in 22 minutes
  • ALL ORDS

    7,278.60
    +19.10 (+0.26%)
     
  • AUD/USD

    0.6959
    -0.0008 (-0.11%)
     
  • ASX 200

    7,029.80
    +9.20 (+0.13%)
     
  • OIL

    90.58
    +0.08 (+0.09%)
     
  • GOLD

    1,792.40
    -1.60 (-0.09%)
     
  • BTC-AUD

    33,361.32
    -1,081.39 (-3.14%)
     
  • CMC Crypto 200

    537.23
    -20.12 (-3.61%)
     

A.G. BARR (LON:BAG) Is Reinvesting At Lower Rates Of Return

  • Oops!
    Something went wrong.
    Please try again later.
·3-min read
In this article:
  • Oops!
    Something went wrong.
    Please try again later.

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. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after briefly looking over the numbers, we don't think A.G. BARR (LON:BAG) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. Analysts use this formula to calculate it for A.G. BARR:

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

0.15 = UK£42m ÷ (UK£336m - UK£58m) (Based on the trailing twelve months to January 2022).

Thus, A.G. BARR has an ROCE of 15%. That's a relatively normal return on capital, and it's around the 14% generated by the Beverage industry.

Check out our latest analysis for A.G. BARR

roce
roce

In the above chart we have measured A.G. BARR'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 A.G. BARR here for free.

How Are Returns Trending?

When we looked at the ROCE trend at A.G. BARR, we didn't gain much confidence. Around five years ago the returns on capital were 19%, but since then they've fallen to 15%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

Our Take On A.G. BARR's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that A.G. BARR is reinvesting for growth and has higher sales as a result. These trends don't appear to have influenced returns though, because the total return from the stock has been mostly flat over the last five years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

One more thing to note, we've identified 1 warning sign with A.G. BARR and understanding it should be part of your investment process.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.

Our goal is to create a safe and engaging place for users to connect over interests and passions. In order to improve our community experience, we are temporarily suspending article commenting