The Returns At Coca-Cola HBC (LON:CCH) Aren't Growing
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. That's why when we briefly looked at Coca-Cola HBC's (LON:CCH) ROCE trend, we were pretty happy with what we saw.
Return On Capital Employed (ROCE): What Is It?
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Coca-Cola HBC:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.15 = €991m ÷ (€10.0b - €3.5b) (Based on the trailing twelve months to June 2023).
So, Coca-Cola HBC has an ROCE of 15%. That's a pretty standard return and it's in line with the industry average of 15%.
View our latest analysis for Coca-Cola HBC
In the above chart we have measured Coca-Cola HBC's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Coca-Cola HBC here for free.
What Does the ROCE Trend For Coca-Cola HBC Tell Us?
While the current returns on capital are decent, they haven't changed much. Over the past five years, ROCE has remained relatively flat at around 15% and the business has deployed 37% more capital into its operations. 15% is a pretty standard return, and it provides some comfort knowing that Coca-Cola HBC has consistently earned this amount. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.
What We Can Learn From Coca-Cola HBC's ROCE
The main thing to remember is that Coca-Cola HBC has proven its ability to continually reinvest at respectable rates of return. And given the stock has only risen 13% over the last five years, we'd suspect the market is beginning to recognize these trends. So because of the trends we're seeing, we'd recommend looking further into this stock to see if it has the makings of a multi-bagger.
One more thing to note, we've identified 2 warning signs with Coca-Cola HBC and understanding these should be part of your investment process.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
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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.
