January 4, 2025
If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So on that note, Constellation Brands ( NYSE:STZ ) looks quite promising in regards to its trends of return on capital.
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 Constellation Brands:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.17 = US$3.5b ÷ (US$23b - US$2.9b) (Based on the trailing twelve months to August 2024) .
So, Constellation Brands has an ROCE of 17%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Beverage industry average of 16%.
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, you can check out the forecasts from the analysts covering Constellation Brands for free.
You'd find it hard not to be impressed with the ROCE trend at Constellation Brands. We found that the returns on capital employed over the last five years have risen by 63%. That's not bad because this tells for every dollar invested (capital employed), the company is increasing the amount earned from that dollar. In regards to capital employed, Constellation Brands appears to been achieving more with less, since the business is using 20% less capital to run its operation. A business that's shrinking its asset base like this isn't usually typical of a soon to be multi-bagger company.
In a nutshell, we're pleased to see that Constellation Brands has been able to generate higher returns from less capital. Since the stock has only returned 27% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.
Like most companies, Constellation Brands does come with some risks, and we've found 5 warning signs that you should be aware of.
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.
