Returns On Capital At Diageo (LON:DGE) Paint An Interesting Picture


Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. This shows us that it’s a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So, when we ran our eye over Diageo’s (LON:DGE) trend of ROCE, we liked what we saw.

What is 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 Diageo:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)

0.13 = UK£3.5b ÷ (UK£33b – UK£6.5b) (Based on the trailing twelve months to June 2020).

Therefore, Diageo has an ROCE of 13%. In absolute terms, that’s a pretty normal return, and it’s somewhat close to the Beverage industry average of 12%.

See our latest analysis for Diageo

roce

LSE:DGE Return on Capital Employed January 17th 2021

Above you can see how the current ROCE for Diageo 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.

What Can We Tell From Diageo’s ROCE Trend?

While the returns on capital are good, they haven’t moved much. Over the past five years, ROCE has remained relatively flat at around 13% and the business has deployed 31% more capital into its operations. 13% is a pretty standard return, and it provides some comfort knowing that Diageo has consistently earned this amount. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.

What We Can Learn From Diageo’s ROCE

The main thing to remember is that Diageo has proven its ability to continually reinvest at respectable rates of return. And since the stock has risen strongly over the last five years, it appears the market might expect this trend to continue. So even though the stock might be more “expensive” than it was before, we think the strong fundamentals warrant this stock for further research.

Since virtually every company faces some risks, it’s worth knowing what they are, and we’ve spotted 4 warning signs for Diageo (of which 1 is a bit unpleasant!) that you should know about.

While Diageo may not currently earn the highest returns, we’ve compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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When trading Diageo or any other investment, use the platform…



Read MoreReturns On Capital At Diageo (LON:DGE) Paint An Interesting Picture

Returns On Capital At Diageo (LON:DGE) Paint An Interesting Picture


Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. This shows us that it’s a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So, when we ran our eye over Diageo’s (LON:DGE) trend of ROCE, we liked what we saw.

What is 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 Diageo:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)

0.13 = UK£3.5b ÷ (UK£33b – UK£6.5b) (Based on the trailing twelve months to June 2020).

Therefore, Diageo has an ROCE of 13%. In absolute terms, that’s a pretty normal return, and it’s somewhat close to the Beverage industry average of 12%.

See our latest analysis for Diageo

roce

LSE:DGE Return on Capital Employed January 17th 2021

Above you can see how the current ROCE for Diageo 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.

What Can We Tell From Diageo’s ROCE Trend?

While the returns on capital are good, they haven’t moved much. Over the past five years, ROCE has remained relatively flat at around 13% and the business has deployed 31% more capital into its operations. 13% is a pretty standard return, and it provides some comfort knowing that Diageo has consistently earned this amount. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.

What We Can Learn From Diageo’s ROCE

The main thing to remember is that Diageo has proven its ability to continually reinvest at respectable rates of return. And since the stock has risen strongly over the last five years, it appears the market might expect this trend to continue. So even though the stock might be more “expensive” than it was before, we think the strong fundamentals warrant this stock for further research.

Since virtually every company faces some risks, it’s worth knowing what they are, and we’ve spotted 4 warning signs for Diageo (of which 1 is a bit unpleasant!) that you should know about.

While Diageo may not currently earn the highest returns, we’ve compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

Promoted
When trading Diageo or any other investment, use the platform…



Read MoreReturns On Capital At Diageo (LON:DGE) Paint An Interesting Picture