To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Ergo, when we looked at the ROCE trends at Monster Beverage (NASDAQ:MNST), we liked what we saw.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Monster Beverage is:

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

0.30 = US$2.0b ÷ (US$8.1b - US$1.2b) (Based on the trailing twelve months to September 2024).

Therefore, Monster Beverage has an ROCE of 30%. In absolute terms that's a great return and it's even better than the Beverage industry average of 16%.

In the above chart we have measured Monster Beverage's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Monster Beverage for free.

What Can We Tell From Monster Beverage's ROCE Trend?

It's hard not to be impressed by Monster Beverage's returns on capital. Over the past five years, ROCE has remained relatively flat at around 30% and the business has deployed 54% more capital into its operations. Now considering ROCE is an attractive 30%, this combination is actually pretty appealing because it means the business can consistently put money to work and generate these high returns. If Monster Beverage can keep this up, we'd be very optimistic about its future.

The Bottom Line

In short, we'd argue Monster Beverage has the makings of a multi-bagger since its been able to compound its capital at very profitable 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 while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.

While Monster Beverage looks impressive, no company is worth an infinite price. The intrinsic value infographic for MNST helps visualize whether it is currently trading for a fair price.

High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.

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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.