If we want to find a stock that could multiply over the long term, what are the underlying trends we should look 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. Ultimately, this demonstrates that it’s a business that is reinvesting profits at increasing rates of return. That’s why when we briefly looked at Constellation Brands’ (NYSE:STZ) ROCE trend, we were pretty happy with what we saw.
What is Return On Capital Employed (ROCE)?
If you haven’t worked with ROCE before, it measures the ‘return’ (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Constellation Brands:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.13 = US$2.9b ÷ (US$26b – US$2.2b) (Based on the trailing twelve months to November 2021).
Therefore, Constellation Brands has an ROCE of 13%. In absolute terms, that’s a satisfactory return, but compared to the Beverage industry average of 7.1% it’s much better.
See our latest analysis for Constellation Brands
Above you can see how the current ROCE for Constellation Brands compares to its prior returns on capital, but there’s only so much you can tell from the past. If you’d like to see what analysts are forecasting going forward, you should check out our free report for Constellation Brands.
What Can We Tell From Constellation Brands’ ROCE Trend?
While the returns on capital are good, they haven’t moved much. The company has consistently earned 13% for the last five years, and the capital employed within the business has risen 48% in that time. Since 13% is a moderate ROCE though, it’s good to see a business can continue to reinvest at these decent rates of return. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.
What We Can Learn From Constellation Brands’ ROCE
To sum it up, Constellation Brands has simply been reinvesting capital steadily, at those decent rates of return. And since the stock has risen strongly over the last five years, it appears the market might expect this trend to continue. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.
On a separate note, we’ve found 1 warning sign for Constellation Brands you’ll probably want to know about.
While Constellation Brands may not currently earn the highest returns, we’ve compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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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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