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What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at A.G. BARR (LON:BAG), it didn't seem to tick all of these boxes.
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 A.G. BARR is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.15 = UK£40m ÷ (UK£330m - UK£59m) (Based on the trailing twelve months to August 2021).
Therefore, A.G. BARR has an ROCE of 15%. In absolute terms, that's a satisfactory return, but compared to the Beverage industry average of 12% it's much better.
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're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
So How Is A.G. BARR's ROCE Trending?
On the surface, the trend of ROCE at A.G. BARR doesn't inspire confidence. Around five years ago the returns on capital were 19%, but since then they've fallen to 15%. However it looks like A.G. BARR might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.
To conclude, we've found that A.G. BARR is reinvesting in the business, but returns have been falling. And investors may be recognizing these trends since the stock has only returned a total of 5.8% to shareholders over the last five years. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.
A.G. BARR could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation on our platform quite valuable.
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.
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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