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If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at Thai Beverage (SGX:Y92) and its trend of ROCE, we really liked what we saw.
What Is Return On Capital Employed (ROCE)?
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Thai Beverage is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.10 = ฿39b ÷ (฿479b - ฿95b) (Based on the trailing twelve months to March 2023).
Thus, Thai Beverage has an ROCE of 10%. That's a relatively normal return on capital, and it's around the 11% generated by the Beverage industry.
Check out our latest analysis for Thai Beverage
Above you can see how the current ROCE for Thai Beverage compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
How Are Returns Trending?
Thai Beverage is showing promise given that its ROCE is trending up and to the right. The figures show that over the last five years, ROCE has grown 30% whilst employing roughly the same amount of capital. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.
The Bottom Line
In summary, we're delighted to see that Thai Beverage has been able to increase efficiencies and earn higher rates of return on the same amount of capital. Since the total return from the stock has been almost flat over the last five years, there might be an opportunity here if the valuation looks good. With that in mind, we believe the promising trends warrant this stock for further investigation.
Thai Beverage does have some risks, we noticed 2 warning signs (and 1 which shouldn't be ignored) we think you should know about.