When searching for potential high-growth investments, one key metric that investors often track is the Return on Capital Employed (ROCE). This metric reveals how effectively a company generates profits from its capital. For those seeking strong, consistent returns, China Resources Beer (Holdings) (HKG:291) stands out as a company worth monitoring.
Understanding ROCE and China Resources Beer (Holdings)
ROCE measures the pre-tax profits a company generates from its capital. It is calculated as:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
For China Resources Beer (Holdings), the ROCE for the trailing twelve months to June 2024 comes in at 10%. In absolute terms, this return is in line with the beverage industry average of 12%, suggesting a relatively standard performance.
Analyzing the ROCE Trend
While China Resources Beer (Holdings) has maintained a consistent 10% ROCE over the last five years, the trend has remained relatively flat. During this period, the company’s capital base has grown significantly, rising by 102%. Although the return itself has not improved, the steady earnings indicate a business that is able to reinvest capital effectively, albeit at a steady pace.
From a business perspective, one positive development is the reduction in current liabilities, now accounting for only 35% of total assets. This shift means the company is relying less on suppliers for financing, reducing some of the risks associated with high leverage.
What Does This Mean for Investors?
Despite consistent returns, the stock price of China Resources Beer (Holdings) has declined by 34% over the past five years, a trend that raises questions about the company’s growth potential. However, for value-oriented investors, this dip in stock price could present an opportunity.
While the company has demonstrated its ability to reinvest capital at steady rates, investors should remain cautious. The stock’s decline suggests that despite solid ROCE, market sentiment may be driven by factors beyond just financial returns.
For those considering an investment, it may be worth looking into the company’s intrinsic value to assess whether its stock is trading at a discount relative to its true worth.
Conclusion
China Resources Beer (Holdings) is showing stable returns on capital but has failed to provide significant growth over the past several years, which may concern some investors. Still, its ability to reinvest capital at a reasonable rate, combined with a reduction in liabilities, could make it an attractive option for long-term investors looking for value. Further research into the company’s fundamentals and stock valuation will be essential for those interested in exploring this potential opportunity.
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