Coca-Cola (NYSE:KO) Has Some Way To Go To Become A Multi-Bagger
What are the early trends we should look for to identify a stock that could multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. Although, when we looked at Coca-Cola (NYSE:KO), it didn't seem to tick all of these boxes.
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. The formula for this calculation on Coca-Cola is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.17 = US$12b ÷ (US$97b - US$23b) (Based on the trailing twelve months to March 2023).
Thus, Coca-Cola has an ROCE of 17%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Beverage industry average of 15%.
View our latest analysis for Coca-Cola
Above you can see how the current ROCE for Coca-Cola compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Coca-Cola.
What The Trend Of ROCE Can Tell Us
Over the past five years, Coca-Cola's ROCE and capital employed have both remained mostly flat. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. With that in mind, unless investment picks up again in the future, we wouldn't expect Coca-Cola to be a multi-bagger going forward. That being the case, it makes sense that Coca-Cola has been paying out 67% of its earnings to its shareholders. These mature businesses typically have reliable earnings and not many places to reinvest them, so the next best option is to put the earnings into shareholders pockets.
The Key Takeaway
We can conclude that in regards to Coca-Cola's returns on capital employed and the trends, there isn't much change to report on. Although the market must be expecting these trends to improve because the stock has gained 56% over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.
If you want to continue researching Coca-Cola, you might be interested to know about the 2 warning signs that our analysis has discovered.
While Coca-Cola isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.
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