If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So when we looked at Monster Beverage (NASDAQ:MNST), they do have a high ROCE, but we weren't exactly elated from how returns are trending.
What Is Return On Capital Employed (ROCE)?
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. The formula for this calculation on Monster Beverage is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.24 = US$1.9b ÷ (US$9.3b - US$1.2b) (Based on the trailing twelve months to September 2023).
Therefore, Monster Beverage has an ROCE of 24%. In absolute terms that's a great return and it's even better than the Beverage industry average of 15%.
Above you can see how the current ROCE for Monster Beverage compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Monster Beverage.
What Does the ROCE Trend For Monster Beverage Tell Us?
In terms of Monster Beverage's historical ROCE movements, the trend isn't fantastic. While it's comforting that the ROCE is high, five years ago it was 30%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.
While returns have fallen for Monster Beverage in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And the stock has followed suit returning a meaningful 92% to shareholders over the last five years. So should these growth trends continue, we'd be optimistic on the stock going forward.
If you're still interested in Monster Beverage it's worth checking out our FREE intrinsic value approximation to see if it's trading at an attractive price in other respects.
High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.
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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.