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Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. 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 on that note, Coca-Cola HBC (LON:CCH) looks quite promising in regards to its trends of return on capital.
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Understanding 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. The formula for this calculation on Coca-Cola HBC is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.17 = €1.2b ÷ (€11b - €3.9b) (Based on the trailing twelve months to December 2024).
Thus, Coca-Cola HBC has an ROCE of 17%. That's a relatively normal return on capital, and it's around the 16% generated by the Beverage industry.
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 for free.
What The Trend Of ROCE Can Tell Us
Investors would be pleased with what's happening at Coca-Cola HBC. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 17%. The amount of capital employed has increased too, by 22%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.
In Conclusion...
A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Coca-Cola HBC has. Since the stock has returned a staggering 123% to shareholders over the last five years, it looks like investors are recognizing these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.
Like most companies, Coca-Cola HBC does come with some risks, and we've found 1 warning sign that you should be aware of.