To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at Coca-Cola Amatil (ASX:CCL) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
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. To calculate this metric for Coca-Cola Amatil, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.12 = AU$535m ÷ (AU$6.0b - AU$1.5b) (Based on the trailing twelve months to June 2020).
Therefore, Coca-Cola Amatil has an ROCE of 12%. On its own, that's a standard return, however it's much better than the 9.1% generated by the Beverage industry.
In the above chart we have measured Coca-Cola Amatil's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Coca-Cola Amatil.
How Are Returns Trending?
Things have been pretty stable at Coca-Cola Amatil, with its capital employed and returns on that capital staying somewhat the same for the last five years. Businesses with these traits tend to be mature and steady operations because they're past the growth phase. So unless we see a substantial change at Coca-Cola Amatil in terms of ROCE and additional investments being made, we wouldn't hold our breath on it being a multi-bagger. On top of that you'll notice that Coca-Cola Amatil has been paying out a large portion (83%) of earnings in the form of dividends to shareholders. If the company is in fact lacking growth opportunities, that's one of the viable alternatives for the money.
Our Take On Coca-Cola Amatil's ROCE
In summary, Coca-Cola Amatil isn't compounding its earnings but is generating stable returns on the same amount of capital employed. And with the stock having returned a mere 30% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.
Coca-Cola Amatil does have some risks though, and we've spotted 4 warning signs for Coca-Cola Amatil that you might be interested in.
While Coca-Cola Amatil isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
This article by Simply Wall St is general in nature. 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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