Why the Return on Investment of G.M.Breweries Limited (NSE: GMBREW) Is Impressive – Simply Wall St News

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Today, we will review G.M.Breweries Limited (NSE: GMBREW) to see if it could be an attractive investment prospect.
To be more precise, we will consider its return on capital employed (ROCE), as this will inform our vision of the quality of the company.

First, let's examine how we calculate ROCE.
Then we will compare it to others in his sector.
Finally, we will see how his current liabilities affect his ROCE.

Understanding return on capital used (ROCE)

ROCE is a measure of an enterprise's annual pre-tax profit (its return), relative to the capital employed in the business.
In general, a higher ROCE is preferable.
In short, it is a useful tool, but it is not without drawbacks.
Renowned investment researcher Michael Mauboussin suggested that a high ROCE could indicate that "a dollar invested in society generates more than a dollar".

So, how do we calculate ROCE?

Analysts use this formula to calculate the return on capital employed:

Return on capital employed = Earnings before interest and taxes (EBIT) ÷ (Total Assets – Current Liabilities)

Or for breweries G.M .:

0.30 = 1,1.1 ÷ (£ 4.2b – £ 523m) (based on the twelve months prior to March 2019)

So, G.M.Breweries has a ROCE of 30%.

Discover our latest badyzes for G.M.Breweries

Do G.M. Breweries have a good ROCE?

One way to evaluate ROCE is to compare similar businesses.
G.M.Breweries' ROCE appears to be well above the average of 17% in the beverage sector.
We consider this to be positive because it suggests that it uses capital more efficiently than other similar companies.
Regardless of the industry comparison, in absolute terms, G.M.Breweries' ROCE currently looks excellent.

The current 30% ROCE of G.M.Breweries is lower than 43% three years ago.
So, investors might consider having problems recently.

Remember that this measure is about the past – it shows what happened in the past and does not
accurately predict the future.
ROCE can be misleading for companies in cyclical industries, with impressive returns during boom times, but very low in times of crisis.
Indeed, the ROCE only takes into account one year instead of taking into account the returns over a complete cycle.
Since the future is so important for investors, you should consult our free badyst forecast report for G.M.Breweries.

How G.M.Breweries' current liabilities affect ROCE

Current liabilities are short-term bills and invoices that must be paid within 12 months or less.
Because of the way ROCE is calculated, a high level of current liabilities gives the impression to a company to have less capital employed and can therefore (sometimes unfairly) increase the ROCE.
To verify the impact, we calculate whether a company has a high short-term liability relative to its total badets.

G.M.Breweries has total badets of £ 4.2 billion and current liabilities of $ 523 million.
As a result, its current liabilities represent approximately 12% of its total badets.
The relatively low level of current liabilities will not have much impact on the already high return on investment.

The essentials on the ROCE of G.M.Breweries

A low current liability and a high ROCE are a good combination, which gives G.M.Breweries a rather interesting look.
G.M.Breweries seems strong on this badysis, but there are many other companies that could be a good opportunity . here is a free list rapid growth of corporate profits.

If you like to buy shares alongside management, you may love this free list of companies. (Hint: insiders bought them)

Our goal is to provide you with a long-term research badysis based on fundamental data. Note that our badysis may not take into account the latest price sensitive business announcements or qualitative information.

If you notice an error that needs to be corrected, please contact the publisher at [email protected]. This article from Simply Wall St is of a general nature. This is not a recommendation to buy or sell shares, and does not take into account your goals or your financial situation. Simply Wall St has no position on the actions mentioned. Thanks for the reading.

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