If you’re not sure where to start when looking for the next multi-bagger, there are a few key trends you should watch out for. In a perfect world, we would like to see a company invest more capital in their business and ideally the returns from that capital also increase. Basically, this means that a business has profitable initiatives that it can continue to reinvest in, which is a hallmark of a blending machine. Therefore, when we looked at ROCE trends at united minds (NSE:MCDOWELL-N), we liked what we saw.
Return on capital employed (ROCE): what is it?
Just to clarify if you’re not sure, ROCE is a measure of the pre-tax income (as a percentage) that a business earns on the capital invested in its business. To calculate this metric for United Spirits, here is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.28 = ₹13b ÷ (₹90b – ₹44b) (Based on the last twelve months to December 2021).
Thereby, United Spirits has a ROCE of 28%. In absolute terms, this is an excellent return and is even better than the beverage industry average of 13%.
Check out our latest analysis for United Spirits
In the chart above, we’ve measured United Spirits’ past ROCE against its past performance, but the future is arguably more important. If you’re interested, you can check out analyst forecasts in our free analyst forecast report for the company.
What does the ROCE trend tell us for United Spirits?
In terms of United Spirits’ ROCE history, that’s pretty impressive. The company has consistently gained 28% over the past five years and the capital employed within the company has increased by 78% over this period. Now considering the ROCE is an attractive 28%, this combination is actually quite attractive because it means the company can consistently put money to work and generate those high returns. If these trends can continue, we wouldn’t be surprised if the company went multi-bagger.
One last thing to note, even though ROCE has remained relatively stable over the past five years, the reduction in current liabilities to 49% of total assets is good to see from a business owner’s perspective. This can eliminate some of the risks inherent in operations, as the business has fewer outstanding obligations to suppliers and/or short-term creditors than before. Although because current liabilities are still 49%, some of that risk is still prevalent.
In summary, we are pleased to see that United Spirits has accumulated returns by reinvesting at consistently high rates of return, as these are common characteristics of a multi-bagger. And the stock has followed suit by returning 79% to shareholders over the past five years. So while investors seem to recognize these promising trends, we still think the stock warrants further research.
On the other side of ROCE, we have to consider valuation. That’s why we have a FREE intrinsic value estimation on our platform definitely worth checking out.
If you want to see other businesses earning high returns, check out our free list of companies earning high returns with strong balance sheets here.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.