There are a few key trends to look for if we want to identify the next multi-bagger. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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 looked at Constellation Brands (NYSE:STZ) and its trend of ROCE, we really liked what we saw.

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 Constellation Brands is:

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

0.17 = US$3.5b ÷ (US$23b - US$2.9b) (Based on the trailing twelve months to August 2024).

So, Constellation Brands has an ROCE of 17%. That's a pretty standard return and it's in line with the industry average of 17%.

Above you can see how the current ROCE for Constellation Brands 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 analyst report for Constellation Brands .

How Are Returns Trending?

You'd find it hard not to be impressed with the ROCE trend at Constellation Brands. The figures show that over the last five years, returns on capital have grown by 63%. The company is now earning US$0.2 per dollar of capital employed. Interestingly, the business may be becoming more efficient because it's applying 20% less capital than it was five years ago. If this trend continues, the business might be getting more efficient but it's shrinking in terms of total assets.

The Bottom Line

In a nutshell, we're pleased to see that Constellation Brands has been able to generate higher returns from less capital. Since the stock has only returned 40% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.

One more thing to note, we've identified 5 warning signs with Constellation Brands and understanding them should be part of your investment process.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.