Investors seeking stocks with potential for long-term value multiplication should focus on companies demonstrating both an increasing return on capital employed (ROCE) and an expanding capital base. These indicators suggest that a company is effectively reinvesting profits into profitable initiatives, characteristic of a compounding business model. In this context, China Resources Beer (Holdings) (HKG:291) presents encouraging trends in its capital efficiency metrics.
Understanding Return on Capital Employed (ROCE)
ROCE measures the pre-tax profitability generated from the capital deployed in a business. It is calculated by dividing earnings before interest and tax (EBIT) by the difference between total assets and current liabilities. For China Resources Beer, the trailing twelve months to December 2024 reveal an EBIT of CN¥4.9 billion and capital employed (total assets minus current liabilities) of CN¥43 billion (CN¥69 billion minus CN¥26 billion), resulting in an ROCE of approximately 11%. This figure is in line with the beverage industry average of around 13%, indicating a stable return on capital.
ROCE Trends and Capital Expansion
Over the past five years, China Resources Beer’s ROCE has risen significantly, reaching 11%. Concurrently, the company’s capital employed has nearly doubled, increasing by 99%. This growth reflects the company’s ability to reinvest capital profitably and expand its operations sustainably. Additionally, the firm’s ratio of current liabilities to total assets has decreased to 38%, suggesting reduced dependence on short-term creditors or suppliers to finance its activities. This shift enhances financial stability and indicates that the company is growing its returns without leveraging short-term liabilities.
Investment Considerations
The combination of rising returns on capital and an expanding capital base indicates that China Resources Beer is successfully capitalizing on previous investments. Despite the stock’s 38% decline over the past five years, these underlying fundamentals may present a compelling opportunity, provided valuation and other financial metrics align. Further research into the company’s future outlook and risk factors is advisable, especially given two identified warning signs that investors should consider.
For investors prioritizing solid financial health and strong returns, China Resources Beer merits attention. Additional resources include a free list of companies with robust balance sheets and high returns on equity for those seeking similar investment opportunities.
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