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There are a few key trends to look for if we want to identify the next multi-bagger. 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. In light of that, when we looked at Coca-Cola Europacific Partners (AMS:CCEP) and its ROCE trend, we weren't exactly thrilled.
Understanding Return On Capital Employed (ROCE)
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Coca-Cola Europacific Partners:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.086 = €2.0b ÷ (€30b - €7.4b) (Based on the trailing twelve months to July 2022).
So, Coca-Cola Europacific Partners has an ROCE of 8.6%. On its own that's a low return on capital but it's in line with the industry's average returns of 9.4%.
View our latest analysis for Coca-Cola Europacific Partners
In the above chart we have measured Coca-Cola Europacific Partners' 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 Europacific Partners here for free.
What Can We Tell From Coca-Cola Europacific Partners' ROCE Trend?
There are better returns on capital out there than what we're seeing at Coca-Cola Europacific Partners. The company has consistently earned 8.6% for the last five years, and the capital employed within the business has risen 56% in that time. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.
The Bottom Line
In summary, Coca-Cola Europacific Partners has simply been reinvesting capital and generating the same low rate of return as before. Since the stock has gained an impressive 83% over the last five years, investors must think there's better things to come. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.
One more thing to note, we've identified 2 warning signs with Coca-Cola Europacific Partners and understanding them 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.