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What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. That's why when we briefly looked at PepsiCo's (NASDAQ:PEP) ROCE trend, we were very 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. The formula for this calculation on PepsiCo is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.20 = US$13b ÷ (US$100b - US$33b) (Based on the trailing twelve months to September 2023).
Therefore, PepsiCo has an ROCE of 20%. In absolute terms that's a great return and it's even better than the Beverage industry average of 15%.
View our latest analysis for PepsiCo
In the above chart we have measured PepsiCo's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
What Can We Tell From PepsiCo's ROCE Trend?
We'd be pretty happy with returns on capital like PepsiCo. The company has consistently earned 20% for the last five years, and the capital employed within the business has risen 25% in that time. With returns that high, it's great that the business can continually reinvest its money at such appealing rates of return. If PepsiCo can keep this up, we'd be very optimistic about its future.
In Conclusion...
In summary, we're delighted to see that PepsiCo has been compounding returns by reinvesting at consistently high rates of return, as these are common traits of a multi-bagger. And since the stock has risen strongly over the last five years, it appears the market might expect this trend to continue. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.
If you'd like to know about the risks facing PepsiCo, we've discovered 3 warning signs that you should be aware of.
PepsiCo is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.
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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.