If you’re not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Typically, we’ll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding 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. With that in mind, the ROCE of Constellation Brands (NYSE:STZ) looks decent, right now, so lets see what the trend of returns can tell us.
Return On Capital Employed (ROCE): What Is It?
For those that aren’t sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Constellation Brands is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.14 = US$3.1b ÷ (US$24b – US$2.7b) (Based on the trailing twelve months to November 2022).
Thus, Constellation Brands has an ROCE of 14%. That’s a pretty standard return and it’s in line with the industry average of 14%.
Check out our latest analysis for Constellation Brands
In the above chart we have measured Constellation Brands’ 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 Constellation Brands here for free.
What Does the ROCE Trend For Constellation Brands Tell Us?
The trend of ROCE doesn’t stand out much, but returns on a whole are decent. The company has employed 24% more capital in the last five years, and the returns on that capital have remained stable at 14%. 14% is a pretty standard return, and it provides some comfort knowing that Constellation Brands has consistently earned this amount. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.
In Conclusion…
In the end, Constellation Brands has proven its ability to adequately reinvest capital at good rates of return. And given the stock has only risen 12% over the last five years, we’d suspect the market is beginning to recognize these trends. That’s why it could be worth your time looking into this stock further to discover if it has more traits of a multi-bagger.
One more thing to note, we’ve identified 1 warning sign with Constellation Brands and understanding it should be part of your investment process.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.
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