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If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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 when we looked at the ROCE trend of Constellation Brands (NYSE:STZ) we really liked what we saw.
What Is Return On Capital Employed (ROCE)?
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 Constellation Brands:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.20 = US$3.5b ÷ (US$22b - US$4.0b) (Based on the trailing twelve months to February 2025).
So, Constellation Brands has an ROCE of 20%. In absolute terms that's a very respectable return and compared to the Beverage industry average of 17% it's pretty much on par.
View our latest analysis for Constellation Brands
In the above chart we have measured Constellation Brands' 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 Constellation Brands for free.
What Can We Tell From Constellation Brands' ROCE Trend?
You'd find it hard not to be impressed with the ROCE trend at Constellation Brands. The figures show that over the last five years, returns on capital have grown by 83%. That's a very favorable trend because this means that the company is earning more per dollar of capital that's being employed. In regards to capital employed, Constellation Brands appears to been achieving more with less, since the business is using 30% less capital to run its operation. If this trend continues, the business might be getting more efficient but it's shrinking in terms of total assets.
For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. The current liabilities has increased to 19% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. Keep an eye out for future increases because when the ratio of current liabilities to total assets gets particularly high, this can introduce some new risks for the business.